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.