Back Custom print Link Text Only Rich Text Print

  • 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