1.This Standard must be read in conjunction with the Capital Regulations Circular No 52/2017, in which Tier Capital the Tier Capital Supply Standard defines criteria required for capital to be classified as Additional Tier 1 (AT1) and Tier 2 (T2). Non-exhaustive examples of features are optional calls, coupon payments, and distributable items.

2.The purpose of this Standard is to:

• •Clarify the requirements for classification of AT1 and T2 instruments in the UAE
• •Provide a robust Tier Capital instrument framework to the industry,
• •Support a standardisation of AT1 and T2 instruments in the market
• •Implement a clear application and approval process.

3.Banks wishing to issue any type of capital, including AT1 and T2, must request approval of the Central Bank of the UAE prior to issuance of the instrument. The bank may only issue the intended capital component after having submitted documentation described in the Application Process in the Appendix to this Standard and after the Board of the Central Bank of the UAE has approved the issuance of the instrument.

4.The Central Bank requires banks to issue AT1 and T2 instruments that are simple and robust in absorbing loss. The capital instrument Standard intends to:

• •Ensure the soundness of individual institutions
• •Reduce the variety of capital instruments in the market
• •Regulate the quality of instruments issued in the UAE
• •Monitor the amount of capital being issued in the market; and
• •Enhance the financial stability of the banking sector.

5.This Standard explains the requirements for Tier Capital instruments, the application process, and approval procedures followed by the Central Bank. It applies to all local banks operating in the UAE since only local banks are permitted to issue Additional Tier 1 or Tier 2 instruments. Foreign branches, however, are permitted to issue Tier 2 subordinated term loans from their Head Offices restricted to a maximum of 3% of their risk-weighted assets. Banks are responsible for ensuring that their capital instruments comply with all applicable requirements. This Standard will be updated from time to time to reflect relevant regulatory development.

In general, terms in this Standard have the meanings defined in other Regulations and Standards issued by the Central Bank. In addition, for this Standard, the following terms have the meanings defined in this section.

1. a.Capital Regulations, Standards and Guidance, means regulatory capital requirements for the maintenance of capital applicable to the issuer, including transitional rules. It includes the Capital Regulation, the Capital Standards, and Capital Guidance.
2. b.Central Bank means the Central Bank of the United Arab Emirates.
3. c.Distributable Items means the amount of the issuer's consolidated retained earnings and reserves after the transfer of any amounts to non-distributable reserves, all as set out in the most recent audited or auditor reviewed consolidated financial statements of the issuer or any equivalent or successor term from time to time as prescribed by the Capital Regulations, including the applicable criteria for Tier 1 capital instruments that do not constitute Common Equity Tier 1 Capital;
4. d.Grandfathering is part of the transition process. In order to qualify for the grandfathering arrangements, an instrument must have a particular cut-off date. Any instrument entered into before 1st January 2018, which does not meet the qualifying criteria for the particular tier of capital, in this Standard will be grandfathered.
5. e.Non-Viable: The bank shall be Non-Viable if it is at least (a) insolvent, bankrupt, unable to pay a material part of its obligations as they fall due or unable to carry on its business, or (b) any other event or circumstance occurs that the Central Bank deems necessary to declare the bank to be Non-Viable.
6. f.Point of Non-Viability (PONV): A Point of Non-Viability means that the Regulator has determined that the bank has or will become non-viable without: (a) a write-down of the principal amount of the instrument, or (b) a public injection of capital (or equivalent support).
7. g.Tier Capital Instruments: Capital instruments other than Core Equity Tier 1 (CET1) capital, that qualify for recognition as Additional Tier 1 (AT1) or Tier 2 (T2) regulatory capital instruments according to the requirements of this Standard.

6.Tier Capital Instruments must fulfil the criteria described in these capital standards, including additional requirements described hereunder.

Point of Non Viability (PONV)

1. i.The terms and conditions of Additional Tier 1 and Tier 2 instruments must have a provision that requires the principal amount of such instruments to be written-down upon the occurrence of a trigger event.
2. ii.Banks will be informed in writing upon the occurrence of the bank’s financial position reaching a PONV in the view of the Central Bank.
3. iii.When a PONV occurs on or after the issue date of the instrument, the instrument will be cancelled and all and any rights of any holder of the instrument for payment of any amounts under or in respect of the instrument (including, without limitation, any amounts that may be due and payable) shall be cancelled and not restored under any circumstances.
4. iv.The write-down at the PONV will occur in full and be permanent in nature. A partial write-down may be considered only in exceptional cases as decided by the Central Bank.
5. v.There must not be any impression to the holders that a write-down notice will be sent before the issuer can write-down the principal amount of the instrument.
6. vi.If a bank issues Tier Capital out of a subsidiary and with the intention that such capital is eligible in the consolidated group’s capital, the terms and conditions must specify an additional trigger event. The trigger is the earlier of: (1) a decision that a write-down is required, without which the subsidiary would become non-viable, is necessary, as determined by the regulator of the subsidiary in the home jurisdiction, and (2) Central Bank has determined a Point of Non-Viability for the consolidated bank.

Subordination

7.To ensure subordination of Tier Capital instruments, Tier Capital instruments must be fully written-down upon liquidation or bankruptcy.
 

Solvency Conditions

8.Capital issuances must define Solvency Conditions in the terms and conditions of the instrument. Solvency Conditions must contain at least the following:

1. i.The issuer must be solvent at all times.
2. ii.Ability of the issuer to make payments on the obligations and any payments required to be made, on the relevant date, with respect to all senior obligations and pari passu obligations.
3. iii.The total share capital of the issuer must be greater than zero at all times from the first day of the relevant coupon period to the time of payment of obligations.

Capital Event

9.If the instrument ceases to count as Tier Capital (for example due to a change in the Capital Regulation), the Central Bank will inform the bank in writing of such event accordingly.
 

10.A capital event may occur at any time, due to its unforeseen nature, on or after the issue date. Any attempt to redeem must be subject to the Central Bank’s prior written consent.

Redemption

11.To ensure that Tier Capital instruments comply with the capital requirements as defined in this Standard, any redemption of the instrument requires prior written consent of Central Bank, satisfaction of the solvency conditions and satisfaction of the requirements set out in the Capital Regulations, Standards, and Guidance.
 

12.The issuer may redeem all, but not some part, of the instrument. Only in certain exceptional cases would the Central Bank consider approving partial redemption.

13.The terms and conditions of the instrument must not include terms that in any way indicate that the repurchase or redemption of the instrument may occur at any time.

Redemption Notices

14.All notices are revocable before the relevant redemption date.
 

Special Purpose Vehicle (SPV)

15.Only Islamic banks may use a SPV for capital issuances. The requirements for these issuances are as follows:

1. i.The Mudaraba contract between the issuer and the SPV:
   1. a.Must be subordinated.
   2. b.No such contract will be given on the cancelled coupons so that flexibility of payments is given at any time.
2. ii.The contract must be specific enough and its scope is restricted to a change affecting the issuer, such as a restructure or a merger. The Central Bank will reassess the eligibility of the instrument.
3. iii.Each capital instrument requires a separate SPV that should not engage in any other business or activity.

Currencies

16.Only instruments denominated in UAE Dirhams (AED) or US Dollars (USD) will be accepted for banks incorporated in the UAE. This also applies to instruments issued through a SPV by Islamic banks.
 

17.For issuances by subsidiaries, the respective local currency will be acceptable only in exceptional circumstances with the written approval of the Central Bank.

Specific Requirements for Additional Tier 1

Coupon Cancellation

18.In the event of a coupon cancellation (as stated in the terms and conditions of the instrument), the issuer (as bank or SPV) will not pay the coupon and the following events should be covered as a minimum (Non-Payment Event):

1. i.The coupon payable, when aggregated with any distributions or amounts payable by the issuer as bank or SPV, on any pari passu obligations having:
   1. a.the same dates in respect of payment of such distributions or amounts as, or;
   2. b.otherwise due and payable on the dates for payment of the coupon, exceeds the Distributable Items (on the relevant date for payment of such coupon);
2. ii.The issuer is, on that coupon date:
   1. a.in breach of the Capital Regulations and Standards including any payment restrictions due to breach of capital buffers imposed on the issuer by the Central Bank, as appropriate;
   2. b.or payment of the relevant coupon would cause it to be in breach thereof;
3. iii.The Central Bank requires that the coupon due on the coupon date will not be paid (for any reason the Central Bank may deem necessary);
4. iv.The Solvency Conditions are not satisfied or would no longer be satisfied if the relevant coupon was paid; or
5. v.The issuer, in its sole discretion, has elected that coupon shall not be paid to holders of the capital securities on any coupon date, for example but not limited to, due to a net loss for that period. Other than in respect of any amounts due on any date on which the capital securities are to be redeemed in full, unless the redemption notice is revoked.

Therefore, cancellation of the distributions can be discretionary (v) or mandatory (i)-(iv). Any distributions on the instrument so cancelled, must be cancelled definitively and must not accumulate or be payable at any time thereafter.
 

Non-Payment Event Notice

19.All notices are revocable before a non-payment event is exercised.
 

20.Any failure to provide a notice of a non-payment event will not invalidate the right to cancel the payment of the coupon.

Enforcement Event

21.The right to institute winding-up proceedings is limited to circumstances where payment has become due. Solvency Conditions have to be met in order for the principal, coupon, or any other amount to be due on the relevant payment date. Payments on the instrument can be cancelled after which it will not be due on the relevant payment date. Upon the occurrence of an enforcement event, any holder of the instrument may give written notice to the issuer of the instrument. An enforcement event is related to a non-payment when due and to insolvency.
 

Maximum Distributable Amount (MDA):

22.Distributions are restricted if the bank does not have sufficient capital to fulfill the effective capital conservation buffer. Banks are hence prohibited from making a distribution if their CET1 is below the Combined Buffer Requirement (CBR). The distributions have to be lower than the maximum distributable amount which is calculated as follows:

MDA is calculated as the sum of:

1. i.Interim profits not included in CET1 capital and
2. ii.Year-end profits not included in CET1 capital minus
3. iii.Amounts that would be payable by tax if i) and ii) were to be retained, multiplied by a factor set at:
   1. a.Zero if the CET1 ratio not used to meet the own funds requirement is within the first quartile (i.e. the lowest) of the CBR;
   2. b.0.2 if the CET1 is in the second quartile;
   3. c.0.4 if the CET1 is in the third quartile; and
   4. d.0.6 if the CET1 is in the fourth quartile

MDA should be reduced by:

1. i.A distribution in connection with CET1 capital;
2. ii.Variable remuneration pay or discretionary pension benefits, or variable remuneration pay if the obligation to pay was created at a time when the institution failed to meet the CBR; and
3. iii.Payments on additional tier 1 instruments.

Specific Requirements for Tier 2 instruments

23.Banks have to follow the Tier 2 criteria in the Tier Capital Supply Standard as well as the following additional requirements of this Standard:

Amortisation of Tier 2 Instruments

24.Recognition of the instrument as Tier 2 Capital in its final 5 years to maturity is amortised on a straight-line basis by 20% per annum.

25.If the instrument is repayable in separate tranches, each tranche shall be amortised individually, as if it were a separate loan.

Transition Period

Grandfathering Rules for Additional Tier 1 and Tier 2

26.The below two grandfathering rules apply only to instruments that were issued before the effective date of the Capital Regulation (being 1 February 2017).

1. i.Instruments that are fully Basel III complaint will be grandfathered at 100% eligibility for 10 years starting from Jan 1, 2018 until 31 Dec 2027.
2. ii.Instruments that are not Basel III compliant do no longer qualify as non-common equity Tier 1 capital or Tier 2 capital and will be phased out beginning 1st January 2018.

27.Fixing the base at the nominal amount of such instruments outstanding on 1 January 2018, their recognition is/was capped at 90% from 1 January 2018, with the cap reducing by 10 percentage points in each subsequent year.

28.This cap is applied to Additional Tier 1 and Tier 2 Instruments on an individual instrument base and refers to the amount of that instrument outstanding that no longer meets the relevant entry criteria.

29.If an instrument is repaid in separate tranches, the cap is applied to the reduced amount in all circumstances.

The application process for banks issuing Additional Tier 1 or Tier 2 is a two-stage process:

1.Initial information to be provided to the Central Bank:

The bank shall inform the Central Bank prior to making an official application for approval of any and every issuance. The bank must provide to the Central Bank the following information:

1. 1.Reason(s) for the issuance of the instrument.
2. 2.Main features of the planned instrument: Section 1, 2 and 3 of the Capital Notification form (signature not required).
3. 3.Capital planning for 5 years including balance sheet growth and business performance:
   1. i.assuming approval of the proposed instrument
   2. ii.without the proposed instrument
4. 4.Stress Testing with a stress scenario of the top 2 credit customers are defaulting with the proposed instrument
5. 5.The Central Bank – Financial Stability Stress Department Test results

The intention of such instrument request will be reviewed by the Central Bank and a Non-objection may be granted, so that the bank can proceed with the second stage of the approval process.

2.Actual application to the Central Bank:

To start the approval process, the bank must submit all of the following documents:

1. i.Legal Opinion of an independent appropriately qualified and experienced lawyer that the terms and conditions are compliant with the requirements detailed in the Capital Regulations, Standards and Guidance.
2. ii.Legal opinion of an independent appropriately qualified and experienced lawyer that the obligations contained in terms and conditions will constitute legal, valid, binding and enforceable obligations.
3. iii.Legal opinion of an independent appropriately qualified and experienced lawyer that the Self-Assessment of the issuing bank meets the Conditions and the Capital Regulations.
4. iv.Written confirmation from the bank’s external auditor on the accounting treatment of the Instrument.
5. v.Fully completed Application form (CN1-form), signed by the CEO, CFO, Head of Internal Audit, Head of Compliance and Head of Risk.
6. vi.Detailed terms and conditions of the Instrument that will be part of the prospectus/contract
   1. a.Note that the CN-1 form must contain details of any new, unusual or different features of the instrument
   2. b.Comparison of the intended terms and conditions with a version that is already publicly available and approved by the Central Bank. (Black-lined version)
7. vii.Key SPV-related incorporation documents and underlying mudaraba agreement, if applicable:
8. viii.Market Conformity Analysis (if the instrument will be privately placed).
9. ix.Any other documents requested by the Central Bank, if deemed necessary.

Summary checklist notification to the Central Bank in relation to a regulatory_capital instrument. In addition, kindly supply the following specific information: the CN1-form and the draft terms and conditions of the instrument. Please note that a submission is incomplete unless all requested information has been supplied.

Banks will adhere to the following process when an application for the eligibility of a current capital instrument is submitted to the Central Bank:

1. i)The bank has to determine if the current capital instrument has the following features:
   1. a)A conditional Point of Non-Viability (PONV) that;
   2. b)Needs to be activated by the Central Bank.
2. ii)Once (i) has been met as:
   1. a)Yes: A letter from the Central Bank, the bank should request a letter from the Central Bank, which activates the PONV.
   2. b)No: The bank may directly go to (iii) without approaching the Central Bank for a letter to activate the PONV.
3. iii)The bank will need to follow the Stage 2 process in Appendix B then approach its appointed external lawyers who will certify if the capital instrument conforms to the requirements of the Central Bank for grandfathering purposes. This certification will have to accompany the eligibility application to the Central Bank.
4. iv)The Central Bank will determine if the application fulfills the necessary requirements as approved by the Board of the Central Bank.
5. v)The final application will be submitted to the Central Bank. The Central Bank will decide as to which grandfathering clause to apply to the capital instrument.

It should be noted that a separate eligibility application for each current capital instrument is required by the Central Bank.