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  • CA-2 CA-2 Definition of Regulatory Capital

    • CA-2.1 CA-2.1 Eligible Components

      • CA-2.1.1

        Regulatory Capital is the sum of the following three components (as defined in Rules CA-2.1.5 to CA-2.1.13), subject to the restrictions set out in Section CA-2.2:

        (a) Tier 1: Core capital;
        (b) Tier 2: Supplementary capital; and
        (c) Tier 3: Ancillary capital.

      • CA-2.1.2

        Limits apply to the proportion of Tier 2 and 3 capital allowed, relative to Tier 1. Any excess held is not taken into account in calculating total Regulatory Capital held. See Section CA-2.2.

      • CA-2.1.3

        Except as limited under Paragraph CA-2.2.1, Tiers 1 and 2 can be used to satisfy all elements of the Regulatory Capital Requirement. Tier 3 capital can only be used to meet the Position Risk Requirement (as defined in Section CA-3.2).

        Amended: October 2019
        Amended: January 2016
        Amended: January 2007

      • CA-2.1.4

        Any Tier 3 capital held in excess of the Position Risk Requirement, therefore, is not taken into account when calculating total Regulatory Capital held. See Section CA-2.2.

      • Tier 1 Capital

        • CA-2.1.5

          Tier 1 capital comprises:

          (a) Paid-up ordinary shares (net of treasury shares);
          (b) Share premium reserve;
          (c) Perpetual non-cumulative preference shares;
          (d) General reserves, including statutory reserves, but excluding revaluation reserves;
          (e) Unappropriated retained earnings brought forward;
          (f) Audited retained profits net of declared dividends and tax expenses;
          (g) Current year appropriations including statutory reserves, general reserves and other appropriations; and
          (h) Minority interests, arising on consolidation, in the equity of subsidiaries which are less than wholly owned.

          LESS:

          (i) Goodwill; and
          (j) Current year's cumulative net losses which have been reviewed or audited as per the International Standards on Auditing (ISA) by external auditors.
          Amended: October 2009
          Amended: January 2008
          Amended: January 2007

        • CA-2.1.6

          Tier 1 capital elements included under Paragraph CA-2.1.5(a) to (c) can only be so included if:

          (a) They are issued by the investment firm licensee;
          (b) They are fully paid (only that portion of the shares for which payment has been received may be included);
          (c) They:
          (i) Cannot be redeemed or can only be redeemed on a winding up of the investment firm licensee; or
          (ii) They are only redeemable at the option of the investment firm licensee and comply with any conditions applicable to joint stock companies in Bahrain;
          (d) Any coupon is non-cumulative, and can only be paid out of accumulated realised profits;
          (e) They are able to absorb losses;
          (f) They rank for repayment, upon winding up, no higher than a share of a company incorporated under the Joint Stock companies law of Bahrain; and
          (g) The proceeds of the issue are immediately and fully available to the investment firm licensee.
          Amended: January 2007

        • CA-2.1.7

          An investment firm licensee must not redeem any Tier 1 instrument that it has included in its Regulatory Capital for the purpose of satisfying its Regulatory Capital Requirement without the prior written approval of the CBB.

          Amended: January 2007

      • Tier 2: Supplementary Capital

        • CA-2.1.8

          Tier 2 capital comprises:

          (a) Interim retained profits reviewed by external auditors in accordance with International Standards on Auditing (ISA);
          (b) Limited life redeemable preference shares with an original term of at least five years;
          (c) Asset revaluation reserves, comprising:
          (i) the revaluation of fixed assets to reflect changes in market values, that are reflected in the balance sheet as a revaluation reserve; and
          (ii) hidden or 'latent' revaluation reserves represented by long-term holdings of equity securities valued in the balance sheet at the historical cost of acquisition; and
          (iii) 'latent' revaluation reserves represented by revaluation of 'available for sale' securities to reflect changes in the market value.
          (d) Dated subordinated debt with an original term of over 5 years.

          All types of revaluation reserve may be included, with the concurrence of the external auditor, provided that the assets are prudently valued, fully reflecting the possibility of price fluctuation and forced sale. In the case of 'latent' revaluation reserves, a discount of 55% must be applied to the difference between the historical cost book value and the market value to reflect the potential volatility of this form of unrealized capital;
          (e) General provisions held against future, presently unidentified losses, providing these are freely available to meet losses that subsequently materialise, subject to a maximum of 1.25% of Tier 1 capital. Provisions ascribed to impairment of particular assets or known liabilities are excluded;
          (f) Cumulative preference shares;
          (g) Hybrid instruments, that combine characteristics of equity capital and of debt, and which meet the requirements in CA-2.1.9 and CA-2.1.10;
          (h) Subordinated term debt, comprising conventional unsecured borrowing subordinated (in respect of both interest and principal) to all other liabilities of the investment firm licensee except the share capital and limited life redeemable preference shares. To be eligible for inclusion in Tier 2 capital, subordinated debt capital instruments must have a minimum original fixed term to maturity of over five years. During the last five years to maturity, a cumulative discount (or amortisation) factor of 20% per year will be applied to reflect the diminishing value of these instruments as a continuing source of strength. Unlike instruments included in item (f) above, these instruments are not normally available to participate in the losses of an investment firm licensee which continues trading. For this reason, these instruments will be limited to a maximum of 50% of tier 1 capital; and
          (i) 45% of unrealised gains on equity securities held as available-for-sale (on an aggregate net-basis).
          Amended: January 2016
          Amended: January 2011
          Amended: October 2009
          Amended: January 2008

        • CA-2.1.9

          A hybrid capital instrument may only be included in Regulatory Capital, as a Tier 2 component, if it meets the following conditions:

          (a) It is unsecured, subordinated and fully paid-up;
          (b) It is not redeemable at the initiative of the holder, nor without the prior consent of the CBB;
          (c) It is available to participate in losses without the investment firm licensee being obliged to cease trading (unlike conventional subordinated debt); and
          (d) Although the capital instrument may carry an obligation to pay interest that cannot permanently be reduced or waived (unlike dividends on ordinary shareholders' equity), it allows such obligations to be deferred (as with cumulative preference shares) where the profitability of the investment firm licensee would not support payment.
          Amended: January 2007

        • CA-2.1.10

          In addition to those contained in Rule CA-2.1.9, the following conditions also apply:

          (a) The only events of default must be non-payment of any amount falling due under the terms of the instrument or the winding-up of the investment firm licensee;
          (b) The remedies available to the subordinated creditor in the event of non-payment or other breach of the written agreement or instrument must be limited to petitioning for the winding up of the investment firm licensee or proving the debt in a liquidation of the investment firm licensee;
          (c) Any events of default and any remedy described in (b) must not prejudice the matters in (a);
          (d) The debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (a);
          (e) The debt agreement or terms of the instrument are governed by the laws of Bahrain;
          (f) To the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the investment firm licensee against subordinated amounts included in the investment firm licensee's capital resources owed to them by the investment firm licensee;
          (g) The terms of the instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (a) to (f); and
          (h) The investment firm licensee has obtained an external legal opinion stating that the requirements in (a) to (g) have been met.
          Amended: January 2007

      • Tier 3: Ancillary Capital

        • CA-2.1.11

          Tier 3 capital consists of short-term subordinated debt that meets the following conditions:

          (a) It is unsecured, subordinated and fully paid up;
          (b) It has an original maturity of at least two years;
          (c) It is not repayable before the agreed repayment date; and
          (d) It is subject to a lock-in clause which stipulates that neither interest nor principal may be paid (even at maturity) if such payment means that the investment firm licensee's Regulatory Capital would fall below its Regulatory Capital Requirement.
          Amended: January 2007

      • Deductions, etc.

        • CA-2.1.12

          No value, for Regulatory Capital purposes, may be attributed to any other instrument or resource, without the CBB's written consent. Without limiting the generality of this rule, no value is attributed to any of the following:

          (a) Any implicit items (which relate to future profits and hidden reserves); and
          (b) The unpaid element of any issued shares some or all of which are not 'fully paid' shares.
          Amended: January 2007

        • CA-2.1.13

          Significant investments in and lending of a capital nature to subsidiaries and associated companies engaged in financial activities must be deducted from the sum of Tiers 1 and 2.

        • CA-2.1.14

          For the purposes of CA-2.1.13, 'significant investments' are investments where the investment firm licensee holds more than 20% of the share capital of the investee company. The underlying assets associated with those investments are not included in the investment firm's assets for the purpose of computing its Regulatory Capital Requirement. See also Module GR (Group Supervision).

          Amended: January 2016

    • CA-2.2 CA-2.2 Limits on Components

      • Tier 1: Core Capital

        • CA-2.2.1

          Tier 1 capital must constitute at least half of total Regulatory Capital, i.e. the sum of Tier 2 and Tier 3 capital must not exceed total Tier 1 capital.

      • Tier 2: Supplementary Capital

        • CA-2.2.2

          Long-term subordinated term debt may not comprise more than 50% of Tier 1 (see Paragraph CA-1.1.5A).

          Amended: January 2013

        • CA-2.2.3

          Rule CA-2.1.8(h) sets out the requirements regarding long-term subordinated debt.

          Amended: January 2012

      • Tier 3: Ancillary Capital

        • CA-2.2.4

          Tier 3 capital may only be used to satisfy an investment firm's Position Risk Requirement (PRR). It is limited to 250% of the portion of Tier 1 capital also used to meet the Position Risk Requirement (PRR).

        • CA-2.2.5

          Tier 2 elements may be substituted for Tier 3 up to the Tier 3 limit of 250% (cf. Rule CA-2.2.4), in so far as eligible Tier 2 capital does not exceed total Tier 1 capital, and long-term subordinated debt does not exceed 50% of Tier 1 capital.

        • CA-2.2.6

          Investment firm licensees may hold capital elements in excess of the above limits, but any excess is ignored for the purposes of calculating Regulatory Capital.