CA-2.1.8
Past version: Effective from 01 Jan 2011 to 31 Dec 2015
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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) Cumulative preference shares;
(f) 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;
(g) 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
(h) 45% of unrealised gains on equity securities held as available-for-sale (on an aggregate net-basis).
Amended: January 2011
Amended: October 2009
Amended: January 2008
Amended: October 2009
Amended: January 2008