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Last Update: 14 Jul 2022

Date: 26 Jun 2013

Regulation (EU) No 575/2013 of the European Parliament and of the Council

of 26 June 2013

on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012

(Text with EEA relevance)

 

Introductory Text

PART ONE - GENERAL PROVISIONS

TITLE I - SUBJECT MATTER, SCOPE AND DEFINITIONS

Article 1. Scope

Article 2. Supervisory powers

Article 3. Application of stricter requirements by institutions

Article 4. Definitions

Article 5. Definitions specific to capital requirements for credit risk

TITLE II - LEVEL OF APPLICATION OF REQUIREMENTS

CHAPTER 1 - Application of requirements on an individual basis

Article 6. General principles

Article 7. Derogation from the application of prudential requirements on an individual basis

Article 8. Derogation from the application of liquidity requirements on an individual basis

Article 9. Individual consolidation method

Article 10. Omitted

Article 10a. Application of prudential requirements on a consolidated basis where investment firms are parent undertakings 

CHAPTER 2 - Prudential consolidation

Section 1 - Application of requirements on a consolidated basis

Article 11. General treatment

Article 12. Financial holding company or mixed financial holding company with both a subsidiary credit institution and a subsidiary investment firm

Article 12a. Consolidated calculation for G-SIIs with multiple resolution entities

Article 13. Application of disclosure requirements on a consolidated basis

Article 14. Application of requirements of Article 5 of the Securitisation Regulation on a consolidated basis

Article 15. Omitted

Article 16. Omitted

Article 17. Omitted

Section 2 - Methods for prudential consolidation

Article 18. Methods of prudential consolidation

Section 3 - Scope of prudential consolidation

Article 19. Entities excluded from the scope of prudential consolidation

Article 20. Decisions on prudential requirements

Article 21. Omitted

Article 22. Sub-consolidation in cases of entities in third countries

Article 23. Undertakings in third countries

Article 24. Valuation of assets and off-balance sheet items

PART TWO - OWN FUNDS AND ELIGIBLE LIABILITIES

TITLE I - ELEMENTS OF OWN FUNDS

CHAPTER 1 - Tier 1 capital

Article 25. Tier 1 capital

CHAPTER 2 - Common Equity Tier 1 capital

Section 1 - Common Equity Tier 1 items and instruments

Article 26. Common Equity Tier 1 items

Article 27. Capital instruments of mutuals, cooperative societies, savings institutions or similar institutions in Common Equity Tier 1 items

Article 28. Common Equity Tier 1 instruments

Article 29. Capital instruments issued by mutuals, cooperative societies, savings institutions and similar institutions

Article 30. Consequences of the conditions for Common Equity Tier 1 instruments ceasing to be met

Article 31. Capital instruments subscribed by public authorities in emergency situations

Section 2 - Prudential filters

Article 32. Securitised assets

Article 33. Cash flow hedges and changes in the value of own liabilities

Article 34. Additional value adjustments

Article 35. Unrealised gains and losses measured at fair value

Section 3 - Deductions from Common Equity Tier 1 items, exemptions and alternatives

Sub-Section 1 - Deductions from Common Equity Tier 1 items

Article 36. Deductions from Common Equity Tier 1 items

Article 37. Deduction of intangible assets

Article 38. Deduction of deferred tax assets that rely on future profitability

Article 39. Tax overpayments, tax loss carry backs and deferred tax assets that do not rely on future profitability

Article 40. Deduction of negative amounts resulting from the calculation of expected loss amounts

Article 41. Deduction of defined benefit pension fund assets

Article 42. Deduction of holdings of own Common Equity Tier 1 instruments

Article 43. Significant investment in a financial sector entity

Article 44. Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities and where an institution has a reciprocal cross holding designed artificially to inflate own funds

Article 45. Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities

Article 46. Deduction of holdings of Common Equity Tier 1 instruments where an institution does not have a significant investment in a financial sector entity

Article 47. Deduction of holdings of Common Equity Tier 1 instruments where an institution has a significant investment in a financial sector entity

Article 47a. Non-performing exposures

Article 47b. Forbearance measures

Article 47c. Deduction for non-performing exposures

Sub-Section 2 - Exemptions from and alternatives to deduction from Common Equity Tier 1 items

Article 48. Threshold exemptions from deduction from Common Equity Tier 1 items

Article 49. Requirement for deduction where consolidation or supplementary supervision is applied

Section 4 - Common Equity Tier 1 capital

Article 50. Common Equity Tier 1 capital

CHAPTER 3 - Additional Tier 1 capital

Section 1 - Additional Tier 1 items and instruments

Article 51. Additional Tier 1 items

Article 52. Additional Tier 1 instruments

Article 53. Restrictions on the cancellation of distributions on Additional Tier 1 instruments and features that could hinder the recapitalisation of the institution

Article 54. Write down or conversion of Additional Tier 1 instruments

Article 55. Consequences of the conditions for Additional Tier 1 instruments ceasing to be met

Section 2 - Deductions from Additional Tier 1 items

Article 56. Deductions from Additional Tier 1 items

Article 57. Deductions of holdings of own Additional Tier 1 instruments

Article 58. Deduction of holdings of Additional Tier 1 instruments of financial sector entities and where an institution has a reciprocal cross holding designed artificially to inflate own funds

Article 59. Deduction of holdings of Additional Tier 1 instruments of financial sector entities

Article 60. Deduction of holdings of Additional Tier 1 instruments where an institution does not have a significant investment in a financial sector entity

Section 3 - Additional Tier 1 capital

Article 61. Additional Tier 1 capital

CHAPTER 4 - Tier 2 capital

Section 1 - Tier 2 items and instruments

Article 62. Tier 2 items

Article 63. Tier 2 instruments

Article 64. Amortisation of Tier 2 instruments

Article 65. Consequences of the conditions for Tier 2 instruments ceasing to be met

Section 2 - Deductions from Tier 2 items

Article 66. Deductions from Tier 2 items

Article 67. Deductions of holdings of own Tier 2 instruments

Article 68. Deduction of holdings of Tier 2 instruments of financial sector entities and where an institution has a reciprocal cross holding designed artificially to inflate own funds

Article 69. Deduction of holdings of Tier 2 instruments of financial sector entities

Article 70. Deduction of Tier 2 instruments where an institution does not have a significant investment in a relevant entity

Section 3 - Tier 2 capital

Article 71. Tier 2 capital

CHAPTER 5 - Own funds

Article 72. Own funds

CHAPTER 5a - Eligible liabilities

Section 1 - Eligible liabilities items and instruments

Article 72a. Eligible liabilities items

Article 72b. Eligible liabilities instruments

Article 72c. Amortisation of eligible liabilities instruments

Article 72d. Consequences of the eligibility conditions ceasing to be met

Section 2 - Deductions from eligible liabilities items

Article 72e. Deductions from eligible liabilities items

Article 72f. Deduction of holdings of own eligible liabilities instruments

Article 72g. Deduction base for eligible liabilities items

Article 72h. Deduction of holdings of eligible liabilities of other G-SII entities

Article 72i. Deduction of eligible liabilities where the institution does not have a significant investment in G-SII entities

Article 72j. Trading book exception from deductions from eligible liabilities items

Section 3 - Own funds and eligible liabilities

Article 72k. Eligible liabilities

Article 72l. Own funds and eligible liabilities

CHAPTER 6 - General requirements for own funds and eligible liabilities

Article 73. Distributions on instruments

Article 74. Holdings of capital instruments issued by regulated financial sector entities that do not qualify as regulatory capital

Article 75. Deduction and maturity requirements for short positions

Article 76. Index holdings of capital instruments

Article 77. Conditions for reducing own funds and eligible liabilities

Article 78. Supervisory permission to reduce own funds

Article 78a. Permission to reduce eligible liabilities instruments

Article 79. Temporary waiver from deduction from own funds and eligible liabilities

Article 79a. Assessment of compliance with the conditions for own funds and eligible liabilities instruments

Article 80.  Omitted

TITLE II - MINORITY INTEREST AND ADDITIONAL TIER 1 AND TIER 2 INSTRUMENTS ISSUED BY SUBSIDIARIES

Article 81. Minority interests that qualify for inclusion in consolidated Common Equity Tier 1 capital

Article 82. Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds

Article 83. Qualifying Additional Tier 1 and Tier 2 capital issued by a special purpose entity

Article 84. Minority interests included in consolidated Common Equity Tier 1 capital

Article 85. Qualifying Tier 1 instruments included in consolidated Tier 1 capital

Article 86. Qualifying Tier 1 capital included in consolidated Additional Tier 1 capital

Article 87. Qualifying own funds included in consolidated own funds

Article 88. Qualifying own funds instruments included in consolidated Tier 2 capital

TITLE III - QUALIFYING HOLDINGS OUTSIDE THE FINANCIAL SECTOR

Article 89. Risk weighting and prohibition of qualifying holdings outside the financial sector

Article 90. Alternative to 1 250  % risk weight

Article 91. Exceptions

PART THREE - CAPITAL REQUIREMENTS

TITLE I - GENERAL REQUIREMENTS, VALUATION AND REPORTING

CHAPTER 1 - Required level of own funds

Section 1 - Own funds requirements for institutions

Article 92. Own funds requirements

Article 92a. Requirements for own funds and eligible liabilities for G-SIIs

Article 92b. Requirement for own funds and eligible liabilities for third-country G-SIIs

Article 93. Initial capital requirement on going concern

Article 94. Derogation for small trading book business

Section 2 - Own funds requirements for investment firms with limited authorisation to provide investment services

Article 95. Own funds requirements for investment firms with limited authorisation to provide investment services

Article 96. Own funds requirements for Regulation 19(2) investment firms 

Article 97. Own Funds based on Fixed Overheads

Article 98. Own funds for investment firms on a consolidated basis

CHAPTER 2 - Calculation and reporting requirements

Article 99. Omitted

Article 100. Omitted

Article 101. Omitted

CHAPTER 3 - Trading book

Article 102. Requirements for the trading book

Article 103. Management of the trading book

Article 104. Inclusion in the trading book

Article 104b. Requirements for trading desk

Article 105. Requirements for prudent valuation

Article 106. Internal Hedges

TITLE II - CAPITAL REQUIREMENTS FOR CREDIT RISK

CHAPTER 1 - General principles

Article 107. Approaches to credit risk

Article 108. Use of credit risk mitigation technique under the Standardised Approach and the IRB Approach

Article 109. Treatment of securitisation positions

Article 110. Treatment of credit risk adjustment

CHAPTER 2 - Standardised approach

Section 1 - General principles

Article 111. Exposure value

Article 112. Exposure classes

Article 113. Calculation of risk-weighted exposure amounts

Section 2 - Risk weights

Article 114. Exposures to central governments or central banks

Article 115. Exposures to regional governments or local authorities

Article 116. Exposures to public sector entities

Article 117. Exposures to multilateral development banks

Article 118. Exposures to international organisations

Article 119. Exposures to institutions

Article 120. Exposures to rated institutions

Article 121. Exposures to unrated institutions

Article 122. Exposures to corporates

Article 123. Retail exposures

Article 124. Exposures secured by mortgages on immovable property

Article 125. Exposures fully and completely secured by mortgages on residential property

Article 126. Exposures fully and completely secured by mortgages on commercial immovable property

Article 127. Exposures in default

Article 128. Items associated with particular high risk

Article 129. Exposures in the form of covered bonds

Article 130. Items representing securitisation positions

Article 131. Exposures to institutions and corporates with a short-term credit assessment

Article 132. Exposures in the form of units or shares in CIUs

Article 132a. Approaches for calculating risk-weighted exposure amounts of CIUs

Article 132b. Exclusions from the approaches for calculating risk-weighted exposure amounts of CIUs 

Article 132c. Treatment of off-balance-sheet exposures to CIUs

Article 133. Equity exposures

Article 134. Other items

Section 3 - Recognition and mapping of credit risk assessment

Sub-Section 1 - Recognition of ECAIs

Article 135. Use of credit assessments by ECAIs

Sub-Section 2 - Mapping of ECAI's credit assessments

Article 136. Omitted

Sub-Section 3 - Use of credit assessments by Export Credit Agencies

Article 137. Use of credit assessments by export credit agencies

Section 4 - Use of the ECAI credit assessments for the determination of risk weights

Article 138. General requirements

Article 139. Issuer and issue credit assessment

Article 140. Long-term and short-term credit assessments

Article 141. Domestic and foreign currency items

CHAPTER 3 - Internal Ratings Based Approach

Section 1 - Permission by competent authorities to use the IRB approach

Article 142. Definitions

Article 143. Permission to use the IRB Approach

Article 144. GFSC's assessment of an application to use an IRB Approach

Article 145. Prior experience of using IRB approaches

Article 146. Measures to be taken where the requirements of this Chapter cease to be met

Article 147. Methodology to assign exposures to exposure classes

Article 148. Conditions for implementing the IRB Approach across different classes of exposure and business units

Article 149. Conditions to revert to the use of less sophisticated approaches

Article 150. Conditions for permanent partial use

Section 2 - Calculation of risk-weighted exposure amounts

Sub-Section 1 - Treatment by type of exposure class

Article 151. Treatment by exposure class

Article 152. Treatment of exposures in the form of units or shares in CIUs

Sub-Section 2 - Calculation of risk-weighted exposure amounts for credit risk

Article 153. Risk-weighted exposure amounts for exposures to corporates, institutions and central governments and central banks

Article 154. Risk-weighted exposure amounts for retail exposures

Article 155. Risk-weighted exposure amounts for equity exposures

Article 156. Risk-weighted exposure amounts for other non credit-obligation assets

Sub-Section 3 - Calculation of risk-weighted exposure amounts for dilution risk of purchased receivables

Article 157. Risk-weighted exposure amounts for dilution risk of purchased receivables

Section 3 - Expected loss amounts

Article 158. Treatment by exposure type

Article 159. Treatment of expected loss amounts

Section 4 - PD, LGD and maturity

Sub-Section 1 - Exposures to corporates, institutions and central governments and central banks

Article 160. Probability of default (PD)

Article 161. Loss Given Default (LGD)

Article 162. Maturity

Sub-Section 2 - Retail exposures

Article 163. Probability of default (PD)

Article 164. Loss Given Default (LGD)

Sub-Section 3 - Equity exposures subject to PD/LGD method

Article 165. Equity exposures subject to the PD/LGD method

Section 5 - Exposure value

Article 166. Exposures to corporates, institutions, central governments and central banks and retail exposures

Article 167. Equity exposures

Article 168. Other non credit-obligation assets

Section 6 - Requirements for the IRB approach

Sub-Section 1 - Rating systems

Article 169. General principles

Article 170. Structure of rating systems

Article 171. Assignment to grades or pools

Article 172. Assignment of exposures

Article 173. Integrity of assignment process

Article 174. Use of models

Article 175. Documentation of rating systems

Article 176. Data maintenance

Article 177. Stress tests used in assessment of capital adequacy

Sub-Section 2 - Risk quantification

Article 178. Default of an obligor

Article 179. Overall requirements for estimation

Article 180. Requirements specific to PD estimation

Article 181. Requirements specific to own-LGD estimates

Article 182. Requirements specific to own-conversion factor estimates

Article 183. Requirements for assessing the effect of guarantees and credit derivatives for exposures to corporates, institutions and central governments and central banks where own estimates of LGD are used and for retail exposures

Article 184. Requirements for purchased receivables

Sub-Section 3 - Validation of internal estimates

Article 185. Validation of internal estimates

Sub-Section 4 - Requirements for equity exposures under the internal models approach

Article 186. Own funds requirement and risk quantification

Article 187. Risk management process and controls

Article 188. Validation and documentation

Sub-Section 5 - Internal governance and oversight

Article 189. Corporate Governance

Article 190. Credit risk control

Article 191. Internal Audit

CHAPTER 4 - Credit risk mitigation

Section 1 - Definitions and general requirements

Article 192. Definitions

Article 193. Principles for recognising the effect of credit risk mitigation techniques

Article 194. Principles governing the eligibility of credit risk mitigation techniques

Section 2 - Eligible forms of credit risk mitigation

Sub-Section 1 - Funded credit protection

Article 195. On-balance sheet netting

Article 196. Master netting agreements covering repurchase transactions or securities or commodities lending or borrowing transactions or other capital market-driven transactions

Article 197. Eligibility of collateral under all approaches and methods

Article 198. Additional eligibility of collateral under the Financial Collateral Comprehensive Method

Article 199. Additional eligibility for collateral under the IRB Approach

Article 200. Other funded credit protection

Sub-Section 2 - Unfunded credit protection

Article 201. Eligibility of protection providers under all approaches

Article 202. Eligibility of protection providers under the IRB Approach which qualify for the treatment set out in Article 153(3)

Article 203. Eligibility of guarantees as unfunded credit protection

Sub-Section 3 - Types of derivatives

Article 204. Eligible types of credit derivatives

Section 3 - Requirements

Sub-Section 1 - Funded credit protection

Article 205. Requirements for on-balance sheet netting agreements other than master netting agreements referred to in Article 206

Article 206. Requirements for master netting agreements covering repurchase transactions or securities or commodities lending or borrowing transactions or other capital market driven transactions

Article 207. Requirements for financial collateral

Article 208. Requirements for immovable property collateral

Article 209. Requirements for receivables

Article 210. Requirements for other physical collateral

Article 211. Requirements for treating lease exposures as collateralised

Article 212. Requirements for other funded credit protection

Sub-Section 2 - Unfunded credit protection and credit linked notes

Article 213. Requirements common to guarantees and credit derivatives

Article 214. Sovereign and other public sector counter-guarantees

Article 215. Additional requirements for guarantees

Article 216. Additional requirements for credit derivatives

Article 217. Requirements to qualify for the treatment set out in Article 153(3)

Section 4 - Calculating the effects of credit risk mitigation

Sub-Section 1 - Funded credit protection

Article 218. Credit linked notes

Article 219. On-balance sheet netting

Article 220. Using the Supervisory Volatility Adjustments Approach or the Own Estimates Volatility Adjustments Approach for master netting agreements

Article 221. Using the internal models approach for master netting agreements

Article 222. Financial Collateral Simple Method

Article 223. Financial Collateral Comprehensive Method

Article 224. Supervisory volatility adjustment under the Financial Collateral Comprehensive Method

Article 225. Own estimates of volatility adjustments under the Financial Collateral Comprehensive Method

Article 226. Scaling up of volatility adjustment under the Financial Collateral Comprehensive Method

Article 227. Conditions for applying a 0 % volatility adjustment under the Financial Collateral Comprehensive Method

Article 228. Calculating risk-weighted exposure amounts and expected loss amounts under the Financial Collateral Comprehensive method

Article 229. Valuation principles for other eligible collateral under the IRB Approach

Article 230. Calculating risk-weighted exposure amounts and expected loss amounts for other eligible collateral under the IRB Approach

Article 231. Calculating risk-weighted exposure amounts and expected loss amounts in the case of mixed pools of collateral

Article 232. Other funded credit protection

Sub-Section 2 - Unfunded credit protection

Article 233. Valuation

Article 234. Calculating risk-weighted exposure amounts and expected loss amounts in the event of partial protection and tranching

Article 235. Calculating risk-weighted exposure amounts under the Standardised Approach

Article 236. Calculating risk-weighted exposure amounts and expected loss amounts under the IRB Approach

Section 5 - Maturity mismatches

Article 237. Maturity mismatch

Article 238. Maturity of credit protection

Article 239. Valuation of protection

Section 6 - Basket CRM techniques

Article 240. First-to-default credit derivatives

Article 241. Nth-to-default credit derivatives

CHAPTER 5 - Securitisation

Section 1 - Definitions and criteria for simple, transparent and standardised securitisations

Article 242. Definitions

Article 243. Criteria for STS securitisations qualifying for differentiated capital treatment

Section 2 - Recognition of significant risk transfer

Article 244. Traditional securitisation

Article 245. Synthetic securitisation

Article 246. Operational requirements for early amortisation provisions

Section 3 - Calculation of risk-weighted exposure amounts

Subsection 1 - General Provisions

Article 247. Calculation of risk-weighted exposure amounts

Article 248. Exposure value

Article 249. Recognition of credit risk mitigation for securitisation positions

Article 250. Implicit support

Article 251. Originator institutions’ calculation of risk-weighted exposure amounts securitised in a synthetic securitisation

Article 252. Treatment of maturity mismatches in synthetic securitisations

Article 253. Reduction in risk-weighted exposure amounts

Subsection 2 - Hierarchy of methods and common parameters

Article 254. Hierarchy of methods

Article 255. Determination of K IRB and K SA

Article 256. Determination of attachment point (A) and detachment point (D)

Article 257. Determination of tranche maturity (M T )

Subsection 3 - Methods to calculate risk-weighted exposure amounts

Article 258. Conditions for the use of the Internal Ratings Based Approach (SEC-IRBA)

Article 259. Calculation of risk-weighted exposure amounts under the SEC-IRBA

Article 260. Treatment of STS securitisations under the SEC-IRBA

Article 261. Calculation of risk-weighted exposure amounts under the Standardised Approach (SEC-SA)

Article 262. Treatment of STS securitisations under the SEC-SA

Article 263. Calculation of risk-weighted exposure amounts under the External Ratings Based Approach (SEC-ERBA)

Article 264. Treatment of STS securitisations under the SEC-ERBA

Article 265. Scope and operational requirements for the Internal Assessment Approach

Article 266. Calculation of risk-weighted exposure amounts under the Internal Assessment Approach

Subsection 4 - Caps for securitisation positions

Article 267. Maximum risk weight for senior securitisation positions: look-through approach

Article 268. Maximum capital requirements

Subsection 5 - Miscellaneous provisions

Article 269. Re-securitisations

Article 270. Senior positions in SME securitisations

Article 270a. Additional risk weight

Section 4 - External credit assessments

Article 270b. Use of credit assessments by ECAIs

Article 270c. Requirements to be met by the credit assessments of ECAIs

Article 270d. Use of credit assessments

Article 270e. Securitisation mapping

CHAPTER 6 - Counterparty credit risk

Section 1 - Definitions

Article 271. Determination of the exposure value

Article 272. Definitions

Section 2 - Methods for calculating the exposure value

Article 273. Methods for calculating the exposure value

Article 273a. Conditions for using simplified methods for calculating the exposure value 

Article 273b. Non-compliance with the conditions for using simplified methods for calculating the exposure value of derivatives 

Section 3 - Standardised approach for counterparty credit risk

Article 274. Exposure value

Article 275. Replacement cost

Article 276. Recognition and treatment of collateral #

Article 277. Mapping of transactions to risk categories

Article 277a. Hedging sets 

Article 278. Potential future exposure

Article 279. Calculation of the risk position

Article 279a. Supervisory delta

Article 279b. Adjusted notional amount

Article 279c. Maturity Factor 

Article 280. Hedging set supervisory factor coefficient

Article 280a. Interest rate risk category add-on 

Article 280b. Foreign exchange risk category add-on 

Article 280c. Credit risk category add-on 

Article 280d. Equity risk category add-on 

Article 280e. Commodity risk category add-on 

Article 280f. Other risks category add-on 

Section 4 - Simplified standardised approach for counterparty credit risk

Article 281. Calculation of the exposure value

Section 5- Original exposure method

Article 282. Calculation of the exposure value

Section 6 - Internal Model Method

Article 283. Permission to use the Internal Model Method

Article 284. Exposure value

Article 285. Exposure value for netting sets subject to a margin agreement

Article 286. Management of CCR — Policies, processes and systems

Article 287. Organisation structures for CCR management

Article 288. Review of CCR management system

Article 289. Use test

Article 290. Stress testing

Article 291. Wrong-Way Risk

Article 292. Integrity of the modelling process

Article 293. Requirements for the risk management system

Article 294. Validation requirements

Section 7 - Contractual netting

Article 295. Recognition of contractual netting as risk-reducing

Article 296. Recognition of contractual netting agreements

Article 297. Obligations of institutions

Article 298. Effects of recognition of netting as risk-reducing

Section 8 - Items in the trading book

Article 299. Items in the trading book

Section 9 - Own funds requirements for exposures to a central counterparty

Article 300. Definitions

Article 301. Material scope

Article 302. Monitoring of exposures to CCPs

Article 303. Treatment of clearing members' exposures to CCPs

Article 304. Treatment of clearing members' exposures to clients

Article 305. Treatment of clients' exposures

Article 306. Own funds requirements for trade exposures

Article 307. Own funds requirements for contributions to the default fund of a CCP

Article 308. Own funds requirements for pre-funded contributions to the default fund of a QCCP

Article 309. Own funds requirements for pre-funded contributions to the default fund of a non-qualifying CCP and for unfunded contributions to a non-qualifying CCP

Article 310. Own funds requirements for unfunded contributions to the default fund of a QCCP

Article 311. Own funds requirements for exposures to CCPs that cease to meet certain conditions

TITLE III - OWN FUNDS REQUIREMENTS FOR OPERATIONAL RISK

CHAPTER 1 - General principles governing the use of the different approaches

Article 312. Permission and notification

Article 313. Reverting to the use of less sophisticated approaches

Article 314. Combined use of different approaches

CHAPTER 2 - Basic Indicator Approach

Article 315. Own funds requirement

Article 316. Relevant indicator

CHAPTER 3 - Standardised Approach

Article 317. Own funds requirement

Article 318. Principles for business line mapping

Article 319. Alternative Standardised Approach

Article 320. Criteria for the Standardised Approach

CHAPTER 4 - Advanced measurement approaches

Article 321. Qualitative standards

Article 322. Quantitative Standards

Article 323. Impact of insurance and other risk transfer mechanisms

Article 324. Loss event type classification

TITLE IV - OWN FUNDS REQUIREMENTS FOR MARKET RISK

CHAPTER 1 - General provisions

Article 325. Approaches for calculating the own funds requirements for market risk

Article 325a. Exemptions from specific reporting requirements for market risk

Article 325b. Permission for consolidated requirements

CHAPTER 1a - Alternative standardised approach

Section 1 - General provisions

Article 325c. Scope and structure of the alternative standardised approach

Section 2 - Sensitivities-based method for calculating the own funds requirement

Article 325d. Definitions

Article 325e. Components of the sensitivities-based method

Article 325f. Own funds requirements for delta and vega risks

Article 325g. Own funds requirements for curvature risk

Article 325h. Aggregation of risk-class specific own funds requirements for delta, vega and curvature risks

Article 325i. Treatment of index instruments and multi-underlying options

Article 325j. Treatment of collective investment undertakings

Article 325k. Underwriting positions

Section 3 - Risk factor and sensitivity definitions

Subsection 1 - Risk factor definitions

Article 325l. General interest rate risk factors

Article 325m. Credit spread risk factors for non-securitisation

Article 325n. Credit spread risk factors for securitisation

Article 325o. Equity risk factors

Article 325p. Commodity risk factors

Article 325q. Foreign exchange risk factors

Subsection 2 - Sensitivity definitions

Article 325r. Delta risk sensitivities

Article 325s. Vega risk sensitivities

Article 325t. Requirements on sensitivity computations

Section 4 - The residual risk add-on

Article 325u. Own funds requirements for residual risks

Section 5 - Own funds requirements for the default risk

Article 325v. Definitions and general provisions

Subsection 1 - Own funds requirements for the default risk for non-securitisations

Article 325w. Gross jump-to-default amounts

Article 325x. Net jump-to-default amounts

Article 325y. Calculation of the own funds requirements for the default risk

Subsection 2 - Own funds requirements for the default risk for securitisations not included in the ACTP

Article 325z. Jump-to-default amounts

Article 325aa. Calculation of the own funds requirement for the default risk for securitisations

Subsection 3 - Own funds requirements for the default risk for securitisations included in the ACTP

Article 325ab. Scope

Article 325ac. Jump-to-default amounts for the ACTP

Article 325ad. Calculation of the own funds requirements for the default risk for the ACTP

Section 6 - Risk weights and correlations

Subsection 1 - Delta risk weights and correlations

Article 325ae. Risk weights for general interest rate risk

Article 325af. Intra bucket correlations for general interest rate risk

Article 325ag. Correlations across buckets for general interest rate risk

Article 325ah. Risk weights for credit spread risk for non-securitisations

Article 325ai. Intra-bucket correlations for credit spread risk for non-securitisations

Article 325aj. Correlations across buckets for credit spread risk for non-securitisations

Article 325ak. Risk weights for credit spread risk for securitisations included in the ACTP

Article 325al. Correlations for credit spread risk for securitisations included in the ACTP

Article 325am. Risk weights for credit spread risk for securitisations not included in the ACTP

Article 325an. Intra-bucket correlations for credit spread risk for securitisations not included in the ACTP

Article 325ao. Correlations across buckets for credit spread risk for securitisations not included in the ACTP

Article 325ap. Risk weights for equity risk

Article 325aq. Intra-bucket correlations for equity risk

Article 325ar. Correlations across buckets for equity risk

Article 325as. Risk weights for commodity risk

Article 325at. Intra-bucket correlations for commodity risk

Article 325au. Correlations across buckets for commodity risk

Article 325av. Risk weights for foreign exchange risk

Article 325aw. Correlations for foreign exchange risk

Subsection 2 - Vega and curvature risk weights and correlations

Article 325ax. Vega and curvature risk weights

Article 325ay. Vega and curvature risk correlations

CHAPTER 1b - Alternative internal model approach

Section 1 - Permission and own funds requirements

Article 325az. Alternative internal model approach and permission to use alternative internal models

Article 325ba. Own funds requirements when using alternative internal models

Section 2 - General requirements

Article 325bb. Expected shortfall risk measure

Article 325bc. Partial expected shortfall calculations

Article 325bd. Liquidity horizons

Article 325be. Assessment of the modellability of risk factors

Article 325bf. Regulatory back-testing requirements and multiplication factors

Article 325bg. Profit and loss attribution requirement

Article 325bh. Requirements on risk measurement

Article 325bi. Qualitative requirements

Article 325bj. Internal validation

Article 325bk. Calculation of stress scenario risk measure

Section 3 - Internal default risk model

Article 325bl. Scope of the internal default risk model

Article 325bm. Permission to use an internal default risk model

Article 325bn. Own funds requirements for default risk using an internal default risk model

Article 325bo. Recognition of hedges in an internal default risk model

Article 325bp. Particular requirements for an internal default risk model

CHAPTER 2 - Own funds requirements for position risk

Section 1 - General provisions and specific instruments

Article 326. Own funds requirements for position risk

Article 327. Netting

Article 328. Interest rate futures and forwards

Article 329. Options and warrants

Article 330. Swaps

Article 331. Interest rate risk on derivative instruments

Article 332. Credit Derivatives

Article 333. Securities sold under a repurchase agreement or lent

Section 2 - Debt instruments

Article 334. Net positions in debt instruments

Sub-Section 1 - Specific risk

Article 335. Cap on the own funds requirement for a net position

Article 336. Own funds requirement for non-securitisation debt instruments

Article 337. Own funds requirement for securitisation instruments

Article 338. Own funds requirement for the correlation trading portfolio

Sub-Section 2 - General risk

Article 339. Maturity-based calculation of general risk

Article 340. Duration-based calculation of general risk

Section 3 - Equities

Article 341. Net positions in equity instruments

Article 342. Specific risk of equity instruments

Article 343. General risk of equity instruments

Article 344. Stock indices

Section 4 - Underwriting

Article 345. Reduction of net positions

Section 5 - Specific risk own funds requirements for positions hedged by credit derivatives

Article 346. Allowance for hedges by credit derivatives

Article 347. Allowance for hedges by first and nth-to default credit derivatives

Section 6 - Own funds requirements for CIUs

Article 348. Own funds requirements for CIUs

Article 349. General criteria for CIUs

Article 350. Specific methods for CIUs

CHAPTER 3 - Own funds requirements for foreign-exchange risk

Article 351. De minimis and weighting for foreign exchange risk

Article 352. Calculation of the overall net foreign exchange position

Article 353. Foreign exchange risk of CIUs

Article 354. Closely correlated currencies

CHAPTER 4 - Own funds requirements for commodities risk

Article 355. Choice of method for commodities risk

Article 356. Ancillary commodities business

Article 357. Positions in commodities

Article 358. Particular instruments

Article 359. Maturity ladder approach

Article 360. Simplified approach

Article 361. Extended maturity ladder approach

CHAPTER 5 - Use of internal models to calculate own funds requirements

Section 1 - Permission and own funds requirements

Article 362. Specific and general risks

Article 363. Permission to use internal models

Article 364. Own funds requirements when using internal models

Section 2 - General requirements

Article 365. VaR and stressed VaR Calculation

Article 366. Regulatory back testing and multiplication factors

Article 367. Requirements on risk measurement

Article 368. Qualitative requirements

Article 369. Internal Validation

Section 3 - Requirements particular to specific risk modelling

Article 370. Requirements for modelling specific risk

Article 371. Exclusions from specific risk models

Section 4 - Internal model for incremental default and migration risk

Article 372. Requirement to have an internal IRC model

Article 373. Scope of the internal IRC model

Article 374. Parameters of the internal IRC model

Article 375. Recognition of hedges in the internal IRC model

Article 376. Particular requirements for the internal IRC model

Section 5 - Internal model for correlation trading

Article 377. Requirements for an internal model for correlation trading

TITLE V - OWN FUNDS REQUIREMENTS FOR SETTLEMENT RISK

Article 378. Settlement/delivery risk

Article 379. Free deliveries

Article 380. Waiver

TITLE VI - OWN FUNDS REQUIREMENTS FOR CREDIT VALUATION ADJUSTMENT RISK

Article 381. Meaning of credit valuation adjustment

Article 382. Scope

Article 383. Advanced method

Article 384. Standardised method

Article 385. Alternative to using CVA methods to calculating own funds requirements

Article 386. Eligible hedges

PART FOUR - LARGE EXPOSURES

Article 387. Subject matter

Article 388. Omitted

Article 389. Definition

Article 390. Calculation of the exposure value

Article 391. Definition of an institution for large exposures purposes

Article 392. Definition of a large exposure

Article 393. Capacity to identify and manage large exposures

Article 394. Reporting requirements

Article 395. Limits to large exposures

Article 396. Compliance with large exposures requirements

Article 397. Calculating additional own funds requirements for large exposures in the trading book

Article 398. Procedures to prevent institutions from avoiding the additional own funds requirement

Article 399. Eligible credit mitigation techniques

Article 400. Exemptions

Article 401. Calculating the effect of the use of credit risk mitigation techniques

Article 402. Exposures arising from mortgage lending

Article 403. Substitution approach

PART FIVE - EXPOSURES TO TRANSFERRED CREDIT RISK

TITLE I - GENERAL PROVISIONS FOR THIS PART

Article 404. Scope of application

TITLE II - REQUIREMENTS FOR INVESTOR INSTITUTIONS

Article 405. Retained interest of the issuer

Article 406. Due diligence

Article 407. Additional risk weight

TITLE III - REQUIREMENTS FOR SPONSOR AND ORIGINATOR INSTITUTIONS

Article 408. Criteria for credit granting

Article 409. Disclosure to investors

Article 410. Uniform condition of application

PART SIX - DEFINITIONS AND LIQUIDITY REQUIREMENTS

TITLE I - DEFINITIONS AND LIQUIDITY COVERAGE REQUIREMENT

Article 411. Definitions

Article 412. Liquidity coverage requirement

Article 413. Stable funding requirement

Article 414. Compliance with liquidity requirements

TITLE II - LIQUIDITY REPORTING

Article 415. Reporting obligation and reporting format

Article 416. Reporting on liquid assets

Article 417. Operational requirements for holdings of liquid assets

Article 418. Valuation of liquid assets

Article 419. Currencies with constraints on the availability of liquid assets

Article 420. Liquidity outflows

Article 421. Outflows on retail deposits

Article 422. Outflows on other liabilities

Article 423. Additional outflows

Article 424. Outflows from credit and liquidity facilities

Article 425. Inflows

Article 426. Omitted

TITLE III - REPORTING ON STABLE FUNDING

Article 427. Items providing stable funding

Article 428. Items requiring stable funding

TITLE IV - THE NET STABLE FUNDING RATIO

CHAPTER 1 - The net stable funding ratio

Article 428a. Application on a consolidated basis

Article 428b. The net stable funding ratio

CHAPTER 2 - General rules for the calculation of the net stable funding ratio

Article 428c. Calculation of the net stable funding ratio

Article 428d. Derivative contracts

Article 428da. Derivative Client Clearing

Article 428e. Netting of secured lending transactions and capital market-driven transactions

Article 428f. Interdependent assets and liabilities

Article 428h. Preferential treatment within a group

CHAPTER 3 - Available stable funding

Section 1 - General provisions

Article 428i. Calculation of the amount of available stable funding

Article 428j. Residual maturity of a liability or of own funds

Section 2 - Available stable funding factors

Article 428k. 0% available stable funding factor

Article 428l. 50% available stable funding factor

Article 428m. 90% available stable funding factor

Article 428n. 95% available stable funding factor

Article 428o. 100% available stable funding factor

CHAPTER 4 - Required stable funding

Section 1 - General provisions

Article 428p. Calculation of the amount of required stable funding

Article 428q. Residual maturity of an asset

Section 2 - Required stable funding factors

Article 428r. 0% required stable funding factor

Article 428ra. 2.5% required stable funding factor

Article 428s. 5% required stable funding factor

Article 428t. 7% required stable funding factor

Article 428v. 10% required stable funding factor

Article 428w. 12% required stable funding factor

Article 428x. 15% required stable funding factor

Article 428y. 20% required stable funding factor

Article 428z. 25% required stable funding factor

Article 428aa. 30% required stable funding factor

Article 428ab. 35% required stable funding factor

Article 428ac. 40% required stable funding factor

Article 428ad. 50% required stable funding factor

Article 428ae. 55% required stable funding factor

Article 428af. 65% required stable funding factor

Article 428ag. 85% required stable funding factor

Article 428ah. 100% required stable funding factor

CHAPTER 5 - Derogation for small and non-complex institutions

Article 428ai. Derogation for small and non-complex institutions

CHAPTER 6 - Available stable funding for the simplified calculation of the net stable funding ratio

Section 1 - General provisions

Article 428aj. Simplified calculation of the amount of available stable funding

Article 428ak. Residual maturity of a liability or own funds

Section 2 - Available stable funding factors

Article 428al. 0% available stable funding factor

Article 428am. 50% available stable funding factor

Article 428an. 90% available stable funding factor

Article 428ao. 95% available stable funding factor

Article 428ap. 100% available stable funding factor

CHAPTER 7 - Required stable funding for the simplified calculation of the net stable funding ratio

Section 1 - General provisions

Article 428aq. Simplified calculation of the amount of required stable funding

Article 428ar. Residual maturity of an asset

Section 2 - Required stable funding factors

Article 428as. 0% required stable funding factor

Article 428at. 5% required stable funding factor

Article 428au. 10% required stable funding factor

Article 428av. 20% required stable funding factor

Article 428aw. 50% required stable funding factor

Article 428ax. 55% required stable funding factor

Article 428axa. 65% required stable funding factor

Article 428ay. 85% required stable funding factor

Article 428az. 100% required stable funding factor

PART SEVEN - LEVERAGE

Article 429. Calculation of the leverage ratio

Article 429a. Exposures excluded from the total exposure measure

Article 429b. Calculation of the exposure value of assets

Article 429c. Calculation of the exposure value of derivatives

Article 429d. Additional provisions on the calculation of the exposure value of written credit derivatives

Article 429e. Counterparty credit risk add-on for securities financing transactions

Article 429f. Calculation of the exposure value of off-balance-sheet items

Article 429g. Calculation of the exposure value of regular-way purchases and sales awaiting settlement

PART SEVEN A - REPORTING REQUIREMENTS

Article 430. Reporting on prudential requirements and financial information

Article 430a. Specific reporting obligations

Article 430b. Specific reporting requirements for market risk

PART EIGHT - DISCLOSURE BY INSTITUTIONS

TITLE I - GENERAL PRINCIPLES

Article 431. Disclosure requirements and policies

Article 432. Non-material, proprietary or confidential information

Article 433. Frequency and scope of disclosure

Article 433a. Disclosures by large institutions

Article 433b. Disclosures by small and non-complex institutions

Article 433c. Disclosures by other institutions

Article 434. Means of disclosures

Article 434a. Uniform disclosure formats

TITLE II - TECHNICAL CRITERIA ON TRANSPARENCY AND DISCLOSURE

Article 435. Disclosure of risk management objectives and policies

Article 436. Disclosure of the Scope of application

Article 437. Disclosure of the Own funds

Article 437a. Disclosure of own funds and eligible liabilities

Article 438. Disclosure of own funds requirements and risk-weighted exposure amounts

Article 439. Disclosure of exposures to counterparty credit risk

Article 440. Disclosure of countercyclical capital buffers

Article 441. Disclosure of indicators of global systemic importance

Article 442. Disclosure of exposures to credit risk and dilution risk

Article 443. Disclosure of encumbered and unencumbered assets

Article 444. Disclosure of the use of the Standardised Approach

Article 445. Disclosure of exposure to market risk

Article 446. Disclosure of operational risk management

Article 447. Disclosure of key metrics

Article 448. Disclosure of exposures to interest rate risk on positions not held in the trading book

Article 449. Disclosure of exposures to securitisation positions

Article 449a. Disclosure of environmental, social and governance risks (ESG risks)

Article 450. Disclosure of remuneration policy

Article 451. Disclosure of the leverage ratio

Article 451a. Disclosure of liquidity requirements

TITLE III - QUALIFYING REQUIREMENTS FOR THE USE OF PARTICULAR INSTRUMENTS OR METHODOLOGIES

Article 452. Disclosure of the use of the IRB Approach to credit risk

Article 453. Disclosure of the use of credit risk mitigation techniques

Article 454. Disclosure of the use of the Advanced Measurement Approaches to operational risk

Article 455. Use of Internal Market Risk Models

PART NINE - REGULATIONS AND PRUDENTIAL MEASURES

Article 456. Regulations

Article 457. Technical adjustments and corrections

Article 458. Enhanced prudential requirements

Article 459. Omitted

Article 460. Liquidity

Article 461. Omitted

Article 461a. Alternative standardised approach for market risk

Article 462. Omitted

Article 463. Omitted

Article 464. Omitted

PART TEN - TRANSITIONAL PROVISIONS, REPORTS, REVIEWS AND AMENDMENTS

TITLE I - TRANSITIONAL PROVISIONS

CHAPTER 1 - Own funds requirements, unrealised gains and losses measured at fair value and deductions

Section 1 - Own funds requirements

Article 465. Own funds requirements

Article 466. First time application of International Financial Reporting Standards

Section 2 Unrealised gains and losses measured at fair value

Article 467. Unrealised losses measured at fair value

Article 468. Temporary treatment of unrealised gains and losses measured at fair value through other comprehensive income in view of the COVID-19 pandemic

Section 3 - Deductions

Sub-Section 1 - Deductions from Common Equity Tier 1 items

Article 469. Omitted

Article 469a. Derogation from deductions from Common Equity Tier 1 items for non-performing exposures

Article 470. Exemption from deduction from Common Equity Tier 1 items

Article 471. Exemption from Deduction of Equity Holdings in Insurance Companies from Common Equity Tier 1 Items

Article 472. Omitted

Article 473. Omitted

Article 473a. Introduction of IFRS 9

Sub-Section 2 - Deductions from Additional Tier 1 items

Article 474. Omitted

Article 475. Omitted

Sub-Section 3 - Omitted

Article 476. Omitted

Article 477. Omitted

Sub-Section 4 - Applicable percentages for deduction

Article 478. Applicable percentages for deduction from Common Equity Tier 1, Additional Tier 1 and Tier 2 items

Section 4 - Omitted

Article 479. Omitted

Article 480. Omitted

Section 5 - Additional filters and deductions

Article 481. Additional filters and deductions

Article 482. Scope of application for derivatives transactions with pension funds

CHAPTER 2 - Grandfathering of capital instruments

Section 1 - Omitted

Article 483. Omitted

Section 2 - Instruments not constituting State aid

Sub-Section 1 - Grandfathering eligibility and limits

Article 484. Eligibility for grandfathering of items that qualified as own funds under national transposition measures for Directive 2006/48/EC

Article 485. Eligibility for inclusion in the Common Equity Tier 1 of share premium accounts related to items that qualified as own funds under national transposition measures for Directive 2006/48/EC

Article 486. Limits for grandfathering of items within Common Equity Tier 1, Additional Tier 1 and Tier 2 items

Article 487. Items excluded from grandfathering in Common Equity Tier 1 or Additional Tier 1 items in other elements of own funds

Article 488. Amortisation of items grandfathered as Tier 2 items

Sub-Section 2 Inclusion of instruments with a call and incentive to redeem in additional Tier 1 and Tier 2 items

Article 489. Hybrid instruments with a call and incentive to redeem

Article 490. Tier 2 items with an incentive to redeem

Article 491. Effective maturity

CHAPTER 3 - Transitional provisions for disclosure of own funds

Article 492. Disclosure of own funds

CHAPTER 4 - Large exposures, own funds requirements, leverage and the Basel I Floor

Article 493. Transitional provisions for large exposures

Article 494. Transitional provisions concerning the requirement for own funds and eligible liabilities

Article 494a. Grandfathering of issuances through special purpose entities

Article 494b. Grandfathering of own funds instruments and eligible liabilities instruments

Article 495. Omitted

Article 496. Omitted

Article 497. Omitted

Article 498. Exemption for Commodities dealers

Article 499. Leverage

Article 500. Adjustment for massive disposals

Article 500a. Omitted

Article 500b. Omitted

Article 500c. Omitted

Article 500d. Omitted

Article 501. Adjustment of risk-weighted non-defaulted SME exposures

Articles 501a to 520. Omitted

PART ELEVEN - FINAL PROVISIONS

Article 521. Entry into force and date of application 

Article 522. Saving for pre-exit decisions

ANNEX I - Classification of off-balance sheet items

ANNEX II - Types of derivatives

ANNEX III - Items subject to supplementary reporting of liquid assets

ANNEX IV - Correlation table


  

Regulation (EU) No 575/2013 of the European Parliament and of the Council

of 26 June 2013

on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012

(Text with EEA relevance)

 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Central Bank,

Having regard to the opinion of the European Economic and Social Committee,

Acting in accordance with the ordinary legislative procedure,

Whereas:

  1. The G-20 Declaration of 2 April 2009 on Strengthening of the Financial System called for internationally consistent efforts that are aimed at strengthening transparency, accountability and regulation by improving the quantity and quality of capital in the banking system once the economic recovery is assured. That declaration also called for introduction of a supplementary non-risk based measure to contain the build-up of leverage in the banking system, and the development of a framework for stronger liquidity buffers. In response to the mandate given by the G-20, in September 2009 the Group of Central Bank Governors and Heads of Supervision (GHOS) agreed on a number of measures to strengthen the regulation of the banking sector. Those measures were endorsed by the G-20 leaders at their Pittsburgh Summit of 24 - 25 September 2009 and were set out in detail in December 2009. In July and September 2010, GHOS issued two further announcements on design and calibration of those new measures, and in December 2010, the Basel Committee on Banking Supervision (BCBS) published the final measures, that are referred to as the Basel III framework.
  2. The High Level Group on Financial Supervision in the EU chaired by Jacques de Larosière (the de Larosière group ) invited the Union to develop a more harmonised set of financial regulations. In the context of the future European supervisory architecture, the European Council of 18 and 19 June 2009 also stressed the need to establish a European single rule book applicable to all credit institutions and investment firms in the internal market.
  3. As stated in the de Larosière group's report of 25 February 2009 (the de Larosière report ), a Member State should be able to adopt more stringent national regulatory measures considered to be domestically appropriate for safeguarding financial stability as long as the principles of the internal market and agreed minimum core standards are respected .
  4. Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions have been significantly amended on several occasions. Many provisions of Directives 2006/48/EC and 2006/49/EC are applicable to both credit institutions and investment firms. For the sake of clarity and in order to ensure a coherent application of those provisions, they should be merged into new legislative acts that are applicable to both credit institutions and investment firms, namely this Regulation and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 . For greater accessibility, the provisions of the Annexes to Directives 2006/48/EC and 2006/49/EC should be integrated into the enacting terms of Directive 2013/36/EU and this Regulation.
  5. Together, this Regulation and Directive 2013/36/EU should form the legal framework governing the access to the activity, the supervisory framework and the prudential rules for credit institutions and investment firms (referred to collectively as institutions ). This Regulation should therefore be read together with that Directive
  6. (6) Directive 2013/36/EU, based on Article 53(1) of the Treaty on the Functioning of the European Union (TFEU), should, inter alia, contain the provisions concerning the access to the activity of institutions, the modalities for their governance, and their supervisory framework, such as provisions governing the authorisation of the business, the acquisition of qualifying holdings, the exercise of the freedom of establishment and of the freedom to provide services, the powers of the competent authorities of the home and the host Member States in this regard and the provisions governing the initial capital and the supervisory review of institutions.
  7. This Regulation should, inter alia, contain the prudential requirements for institutions that relate strictly to the functioning of banking and financial services markets and are meant to ensure the financial stability of the operators on those markets as well as a high level of protection of investors and depositors. This Regulation aims at contributing in a determined manner to the smooth functioning of the internal market and should, consequently, be based on the provisions of Article 114 TFEU, as interpreted in accordance with the consistent case-law of the Court of Justice of the European Union.
  8. Directives 2006/48/EC and 2006/49/EC, although having harmonised the rules of Member States in the area of prudential supervision to a certain degree, include a significant number of options and possibilities for Member States to impose stricter rules than those laid down by those Directives. This results in divergences between national rules, which might hamper the cross-border provision of services and the freedom of establishment and so create obstacles to the smooth functioning of the internal market.
  9. For reasons of legal certainty and because of the need for a level playing field within the Union, a single set of regulations for all market participants is a key element for the functioning of the internal market. In order to avoid market distortions and regulatory arbitrage, minimum prudential requirements should therefore ensure maximum harmonisation. As a consequence, the transitional periods provided for in this Regulation are essential for the smooth implementation of this Regulation and to avoid uncertainty for the markets.
  10. Having regard to the work of the BCBS Standards Implementation Group in monitoring and reviewing member countries' implementation of the Basel III framework, the Commission should provide update reports on an ongoing basis, and at least following the publication of each Progress Report by BCBS, on the implementation and domestic adoption of the Basel III framework in other major jurisdictions, including an assessment of the consistency of other countries' legislation or regulations with the international minimum standards, in order to identify differences that could raise level playing field concerns.
  11. In order to remove obstacles to trade and distortions of competition resulting from divergences between national laws and to prevent further likely obstacles to trade and significant distortions of competition from arising, it is therefore necessary to adopt a regulation establishing uniform rules applicable in all Member States.
  12. Shaping prudential requirements in the form of a regulation would ensure that those requirements will be directly applicable. This would ensure uniform conditions by preventing diverging national requirements as a result of the transposition of a directive. This Regulation would entail that all institutions follow the same rules in all the Union, which would also boost confidence in the stability of institutions, especially in times of stress. A regulation would also reduce regulatory complexity and firms' compliance costs, especially for institutions operating on a cross-border basis, and contribute to eliminating competitive distortions. With regard to the peculiarity of immovable property markets, which are characterised by economic developments and jurisdictional differences that are specific to Member States, regions or local areas, competent authorities should be allowed to set higher risks weights or to apply stricter criteria based on default experience and expected market developments to exposures secured by mortgages on immovable property in specific areas.
  13. In areas not covered by this Regulation, such as dynamic provisioning, provisions on national covered bonds schemes not related to the treatment of covered bonds under the rules established by this Regulation, acquisition and holding of participations in both the financial and non-financial sector for purposes not related to prudential requirements specified in this Regulation, competent authorities or Member States should be able to impose national rules, provided that they are not inconsistent with this Regulation.
  14. The most important recommendations advocated in the de Larosière report and later implemented in the Union were the establishment of a single rulebook and a European framework for macroprudential supervision where both elements in combination were aimed at ensuring financial stability. The single rulebook ensures a robust and uniform regulatory framework facilitating the functioning of the internal market and prevents regulatory arbitrage opportunities. Within the internal market for financial services, macroprudential risks may however differ in a number of ways with a range of national specificities resulting in variances being observed for example with regard to the structure and size of the banking sector compared to the wider economy and the credit cycle.
  15. A number of tools to prevent and mitigate macroprudential and systemic risks have been built into this Regulation and Directive 2013/36/EU ensuring flexibility while at the same time ensuring that the use of those tools are subject to appropriate control in order not to harm the functioning of the internal market while also ensuring that the use of such tools is transparent and consistent.
  16. Beyond the systemic risk buffer tool included in Directive 2013/36/EU, where macroprudential or systemic risks concern a Member State, the competent or designated authorities of the relevant Member State should have the possibility to address those risks by certain specific national macroprudential measures, when this is considered more effective to tackle those risks. The European Systemic Risk Board (ESRB) established by Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 and the European Supervisory Authority (European Banking Authority) (EBA) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 should have the opportunity to provide their opinions on whether the conditions for such national macroprudential measures are met and there should be a Union mechanism to prevent national measures from proceeding, where there is very strong evidence that the relevant conditions are not satisfied. Whilst this Regulation establishes uniform microprudential rules for institutions, Member States retain a leading role in macroprudential oversight because of their expertise and their existing responsibilities in relation to financial stability. In that specific case, since the decision to adopt any national macroprudential measures includes certain assessments in relation to risks which may ultimately affect the macroeconomic, fiscal and budgetary situation of the relevant Member State, it is necessary that the power to reject the proposed national macroprudential measures is conferred on the Council in accordance with Article 291 TFEU, acting on a proposal by the Commission.
  17. Where the Commission has submitted to the Council a proposal to reject national macroprudential measures, the Council should examine that proposal without delay and decide whether or not to reject the national measures. A vote could be taken in accordance with the Rules of Procedure of the Council at the request of a Member State or of the Commission. In accordance with Article 296 TFEU, the Council should state the reasons for its decision with respect to the conditions laid down in this Regulation for its intervention. Considering the importance of the macroprudential and systemic risk for the financial market of the Member State concerned and, therefore, the need for rapid reaction, it is important that the time limit for such a Council decision is set to one month. If the Council, after having examined the proposal by the Commission to reject the proposed national measures in depth, comes to the conclusion that the conditions laid down in this Regulation for the rejection of the national measures were not fulfilled, it should always provide its reasons in a clear and unambiguous manner.
  18. Until the harmonisation of liquidity requirements in 2015 and the harmonisation of a leverage ratio in 2018, Member States should be able to apply such measures as they consider appropriate, including measures to mitigate macroprudential or systemic risk in a specific Member State.
  19. It should be possible to apply systemic risk buffers or individual measures taken by Member States to address systemic risks concerning those Member States, to the banking sector in general or to one or more subsets of the sector, meaning subsets of institutions that exhibit similar risk profiles in their business activities, or to the exposures to one or several domestic economic or geographic sectors across the banking sector.
  20. If two or more Member States' designated authorities identify the same changes in the intensity of systemic or macroprudential risk posing a risk to financial stability at the national level in each Member State which the designated authorities consider would better be addressed by means of national measures, the Member States may submit a joint notification to the Council, the Commission, the ESRB and EBA. When notifying the Council, the Commission, the ESRB and EBA, Member States should submit relevant evidence, including a justification of the joint notification.
  21. The Commission should furthermore be empowered to adopt a delegated act temporarily increasing the level of own funds requirements, requirements for large exposures and public disclosure requirements. Such provisions should be applicable for a period of one year, unless the European Parliament or the Council has objected to the delegated act within a period of three months. The Commission should state the reasons for the use of such a procedure. The Commission should only be empowered to impose stricter prudential requirements for exposures which arise from market developments in the Union or outside the Union affecting all Member States.
  22. A review of the macroprudential rules is justified in order for the Commission to assess, among other things, whether the macroprudential tools in this Regulation or Directive 2013/36/EU are effective, efficient and transparent, whether new instruments should be proposed, whether the coverage and the possible degrees of overlap of the macroprudential tools for targeting similar risks in this Regulation or Directive 2013/36/EU are appropriate and how internationally agreed standards for systemically important institutions interacts with this Regulation or Directive 2013/36/EU.
  23. Where Member States adopt guidelines of general scope, in particular in areas where the adoption by the Commission of draft technical standards is pending, those guidelines shall neither contradict Union law nor undermine its application.
  24. This Regulation does not prevent Member States from imposing, where appropriate, equivalent requirements on undertakings that do not fall within its scope.
  25. The general prudential requirements set out in this Regulation are supplemented by individual arrangements that are decided by the competent authorities as a result of their ongoing supervisory review of individual institutions. The range of such supervisory arrangements should, inter alia, be set out in Directive 2013/36/EU since the competent authorities should be able to exert their judgment as to which arrangements should be imposed.
  26. This Regulation should not affect the ability of competent authorities to impose specific requirements under the supervisory review and evaluation process set out in Directive 2013/36/EU that should be tailored to the specific risk profile of institutions.
  27. Regulation (EU) No 1093/2010 aims at upgrading the quality and consistency of national supervision and strengthening oversight of cross-border groups.
  28. Given the increase in the number of tasks conferred on EBA by this Regulation and by Directive 2013/36/EU, the European Parliament, the Council and the Commission should ensure that adequate human and financial resources are made available without delay.
  29. Regulation (EU) No 1093/2010 requires EBA to act within the scope of Directives 2006/48/EC and 2006/49/EC. EBA is also required to act in the field of activities of institutions in relation to issues not directly covered in those Directives, provided that such actions are necessary to ensure the effective and consistent application of those Directives. This Regulation should take into account the role and function of EBA and facilitate the exercise of EBA's powers set out in Regulation (EU) No 1093/2010.
  30. After the observation period and the full implementation of a liquidity coverage requirement in accordance with this Regulation, the Commission should assess whether granting EBA a power of initiative to intervene with binding mediation in relation to the reaching of joint decisions by the competent authorities under Articles 20 and 21 of this Regulation would facilitate the practical formation and operation of single liquidity sub-groups as well as the determination of whether criteria for a specific intragroup treatment for cross-border institutions are met. Therefore, at that time, as part of one of the regular reports on the operation of EBA under Article 81 of Regulation (EU) No 1093/2010, the Commission should specifically examine the need to grant EBA such powers and include the results of this examination in its report, which should be accompanied by appropriate legislative proposals, where appropriate.
  31. The de Larosière report stated that microprudential supervision cannot effectively safeguard financial stability without adequately taking account of developments at macro level, while macroprudential oversight is not meaningful unless it can somehow impact on supervision at the micro level. Close cooperation between EBA and the ESRB is essential to give full effectiveness to the functioning of the ESRB and follow up to its warnings and recommendations. In particular, EBA should be able to transmit to the ESRB all relevant information gathered by competent authorities in accordance with the reporting obligations set out in this Regulation.
  32. Considering the devastating effects of the latest financial crisis the overall objectives of this Regulation are to encourage economically useful banking activities that serve the general interest and to discourage unsustainable financial speculation without real added value. This implies a comprehensive reform of the ways savings are channelled into productive investments. In order to safeguard a sustainable and diverse banking environment in the Union, competent authorities should be empowered to impose higher capital requirements for systemically important institutions that are able, due to their business activities, to pose a threat to the global economy.
  33. Equivalent financial requirements for institutions holding money or securities belonging to their clients are necessary to ensure similar safeguards for savers and fair conditions of competition between comparable groups of institutions.
  34. Since institutions in the internal market are engaged in direct competition, monitoring requirements should be equivalent throughout the Union taking into account the different risk profiles of the institutions.
  35. Whenever in the course of supervision it is necessary to determine the amount of the consolidated own funds of a group of institutions, the calculation should be effected in accordance with this Regulation.
  36. According to this Regulation own funds requirements apply on an individual and consolidated basis, unless competent authorities do not apply supervision on an individual basis where they deem this appropriate. Individual, consolidated and cross-border consolidated supervision are useful tools in overseeing institutions.
  37. In order to ensure adequate solvency of institutions within a group it is essential that the capital requirements apply on the basis of the consolidated situation of those institutions within the group. In order to ensure that own funds are appropriately distributed within the group and available to protect savings where needed, the capital requirements should apply to individual institutions within a group, unless this objective can be effectively achieved otherwise.
  38. The minority interests arising from intermediate financial holding companies that are subject to the requirements of this Regulation on a sub-consolidated basis may also be eligible, within the relevant limits, as Common Equity Tier 1 capital of the group on a consolidated basis, as the Common Equity Tier 1 capital of an intermediate financial holding company attributable to minority interests and the part of that same capital attributable to the parent company support both pari passu the losses of their subsidiaries when they occur.
  39. The precise accounting technique to be used for the calculation of own funds, their adequacy for the risk to which an institution is exposed, and for the assessment of the concentration of exposures should take account of the provisions of Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions , which incorporates certain adaptations of the provisions of Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts , or of Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards , whichever governs the accounting of the institutions under national law.
  40. For the purposes of ensuring adequate solvency it is important to lay down capital requirements which weight assets and off-balance sheet items according to the degree of risk.
  41. On 26 June 2004 , the BCBS adopted a framework agreement on the international convergence of capital measurement and capital requirements ( Basel II framework ). The provisions in Directives 2006/48/EC and 2006/49/EC that this Regulation has taken over are equivalent to the provisions of the Basel II framework. Consequently, by incorporating the supplementary elements of the Basel III framework this Regulation is equivalent to the provisions of the Basel II and III frameworks.
  42. It is essential to take account of the diversity of institutions in the Union by providing alternative approaches to the calculation of capital requirements for credit risk incorporating different levels of risk-sensitivity and requiring different degrees of sophistication. Use of external ratings and institutions' own estimates of individual credit risk parameters represents a significant enhancement in the risk-sensitivity and prudential soundness of the credit risk rules. Institutions should be encouraged to move towards the more risk-sensitive approaches. In producing the estimates needed to apply the approaches to credit risk of this Regulation, institutions should enhance their credit risk measurement and management processes to make available methods for determining regulatory own funds requirements that reflect the nature, scale, and complexity of individual institutions' processes. In this regard, the processing of data in connection with the incurring and management of exposures to customers should be considered to include the development and validation of credit risk management and measurement systems. That serves not only to fulfil the legitimate interests of institutions but also the purpose of this Regulation, to use better methods for risk measurement and management and also use them for regulatory own funds purposes. Notwithstanding this, the more risk-sensitive approaches require considerable expertise and resources as well as data of high quality and sufficient volume. Institutions should therefore comply with high standards before applying those approaches for regulatory own funds purposes. Given the ongoing work on ensuring appropriate backstops to internal models, the Commission should prepare a report on the possibility of extending the Basel I floor together with a legislative proposal, if appropriate.
  43. The capital requirements should be proportionate to the risks addressed. In particular the reduction in risk levels deriving from having a large number of relatively small exposures should be reflected in the requirements.
  44. Small and medium-sized enterprises (SMEs) are one of the pillars of the Union economy given their fundamental role in creating economic growth and providing employment. The recovery and future growth of the Union economy depends largely on the availability of capital and funding to SMEs established in the Union to carry out the necessary investments to adopt new technologies and equipment to increase their competitiveness. The limited amount of alternative sources of funding has made SMEs established in the Union even more sensitive to the impact of the banking crisis. It is therefore important to fill the existing funding gap for SMEs and ensure an appropriate flow of bank credit to SMEs in the current context. Capital charges for exposures to SMEs should be reduced through the application of a supporting factor equal to 0,7619 to allow credit institutions to increase lending to SMEs. To achieve this objective, credit institutions should effectively use the capital relief produced through the application of the supporting factor for the exclusive purpose of providing an adequate flow of credit to SMEs established in the Union. Competent authorities should monitor periodically the total amount of exposures to SMEs of credit institutions and the total amount of capital deduction.
  45. In line with the decision of the BCBS, as endorsed by the GHOS on 10 January 2011 , all additional Tier 1 and Tier 2 instruments of an institution should be capable of being fully and permanently written down or converted fully into Common Equity Tier 1 capital at the point of non-viability of the institution. Necessary legislation to ensure that own funds instruments are subject to the additional loss absorption mechanism should be incorporated into Union law as part of the requirements in relation to the recovery and resolution of institutions. If by 31 December 2015 , Union law governing the requirement that capital instruments should be capable of being fully and permanently written down to zero or converted into Common Equity Tier 1 instruments in the event that an institution is no longer considered viable has not been adopted, the Commission should review and report on whether such a provision should be included in this Regulation and, in light of that review, submit appropriate legislative proposals.
  46. The provisions of this Regulation respect the principle of proportionality, having regard in particular to the diversity in size and scale of operations and to the range of activities of institutions. Respect for the principle of proportionality also means that the simplest possible rating procedures, even in the Internal Ratings Based Approach ( IRB Approach ), are recognised for retail exposures. Member States should ensure that the requirements laid down in this Regulation apply in a manner proportionate to the nature, scale and complexity of the risks associated with an institution's business model and activities. The Commission should ensure that delegated and implementing acts, regulatory technical standards and implementing technical standards are consistent with the principle of proportionality, so as to guarantee that this Regulation is applied in a proportionate manner. EBA should therefore ensure that all regulatory and implementing technical standards are drafted in such a way that they are consistent with and uphold the principle of proportionality.
  47. Competent authorities should pay appropriate attention to cases where they suspect that information is regarded as proprietary or confidential in order to avoid disclosure of such information. Although an institution may opt not to disclose information as the information is regarded as proprietary or confidential, the fact that information is being regarded as proprietary or confidential should not discharge liability arising from non-disclosure of that information when such non-disclosure is found to have material effect.
  48. The evolutionary nature of this Regulation enables institutions to choose amongst three approaches to credit risk of varying complexity. In order to allow especially small institutions to opt for the more risk-sensitive IRB Approach, the relevant provisions should be read so that exposure classes include all exposures that are, directly or indirectly, put on a par with them throughout this Regulation. As a general rule, the competent authorities should not discriminate between the three approaches with regard to the supervisory review process, i.e. institutions operating according to the provisions of the Standardised Approach should not, for that reason alone, be supervised on a stricter basis.
  49. Increased recognition should be given to techniques of credit risk mitigation within a framework of rules designed to ensure that solvency is not undermined by undue recognition. The relevant Member States' current customary banking collateral for mitigating credit risks should wherever possible be recognised in the Standardised Approach, but also in the other approaches.
  50. In order to ensure that the risks and risk reductions arising from institutions' securitisation activities and investments are appropriately reflected in the capital requirements of institutions it is necessary to include rules providing for a risk-sensitive and prudentially sound treatment of such activities and investments. To this end, a clear and encompassing definition of securitisation is needed that captures any transaction or scheme whereby the credit risk associated with an exposure or pool of exposures is tranched. An exposure that creates a direct payment obligation for a transaction or scheme used to finance or operate physical assets should not be considered an exposure to a securitisation, even if the transaction or scheme has payment obligations of different seniority.
  51. Alongside surveillance aimed at ensuring financial stability, there is a need for mechanisms designed to enhance and develop an effective surveillance and prevention of potential bubbles in order to ensure optimum allocation of capital in the light of the macroeconomic challenges and objectives, in particular with respect to long term investment in the real economy.
  52. Operational risk is a significant risk faced by institutions requiring coverage by own funds. It is essential to take account of the diversity of institutions in the Union by providing alternative approaches to the calculation of operational risk requirements incorporating different levels of risk-sensitivity and requiring different degrees of sophistication. There should be appropriate incentives for institutions to move towards the more risk-sensitive approaches. In view of the emerging state of the art for the measurement and management of operational risk the rules should be kept under review and updated as appropriate including in relation to the charges for different business lines and the recognition of risk mitigation techniques. Particular attention should be paid in this regard to taking insurance into account in the simple approaches to calculating capital requirements for operational risk.
  53. The monitoring and control of an institution's exposures should be an integral part of its supervision. Therefore, excessive concentration of exposures to a single client or group of connected clients may result in an unacceptable risk of loss. Such a situation can be considered prejudicial to the solvency of an institution.
  54. In determining the existence of a group of connected clients and thus exposures constituting a single risk, it is also important to take into account risks arising from a common source of significant funding provided by the institution itself, its financial group or its connected parties.
  55. While it is desirable to base the calculation of the exposure value on that provided for the purposes of own funds requirements, it is appropriate to adopt rules for the monitoring of large exposures without applying risk weightings or degrees of risk. Moreover, the credit risk mitigation techniques applied in the solvency regime were designed with the assumption of a well-diversified credit risk. In the case of large exposures dealing with single name concentration risk, credit risk is not well diversified. The effects of those techniques should therefore be subject to prudential safeguards. In this context, it is necessary to provide for an effective recovery of credit protection for the purposes of large exposures.
  56. Since a loss arising from an exposure to an institution can be as severe as a loss from any other exposure, such exposures should be treated and reported in the same manner as any other exposures. An alternative quantitative limit has been introduced to alleviate the disproportionate impact of such an approach on smaller institutions. In addition, very short-term exposures related to money transmission including the execution of payment services, clearing, settlement and custody services to clients are exempt to facilitate the smooth functioning of financial markets and of the related infrastructure. Those services cover, for example, the execution of cash clearing and settlement and similar activities to facilitate settlement. The related exposures include exposures which might not be foreseeable and are therefore not under the full control of a credit institution, inter alia, balances on inter-bank accounts resulting from client payments, including credited or debited fees and interest, and other payments for client services, as well as collateral given or received.
  57. It is important that the interests of undertakings that re-package loans into tradable securities and other financial instruments (originators or sponsors) and undertakings that invest in these securities or instruments (investors) are aligned. To achieve this, the originator or sponsor should retain a significant interest in the underlying assets. It is therefore important for the originators or the sponsors to retain exposure to the risk of the loans in question. More generally, securitisation transactions should not be structured in such a way as to avoid the application of the retention requirement, in particular through any fee or premium structure or both. Such retention should be applicable in all situations where the economic substance of a securitisation is applicable, whatever legal structures or instruments are used to obtain this economic substance. In particular where credit risk is transferred by securitisation, investors should make their decisions only after conducting thorough due diligence, for which they need adequate information about the securitisations.
  58. This Regulation also provides that there be no multiple applications of the retention requirement. For any given securitisation it suffices that only the originator, the sponsor or the original lender is subject to the requirement. Similarly, where securitisation transactions contain other securitisations as an underlying, the retention requirement should be applied only to the securitisation which is subject to the investment. Purchased receivables should not be subject to the retention requirement if they arise from corporate activity where they are transferred or sold at a discount to finance such activity. Competent authorities should apply the risk weight in relation to non-compliance with due diligence and risk management obligations in relation to securitisation for non-trivial breaches of policies and procedures which are relevant to the analysis of the underlying risks. The Commission should also review whether avoidance of multiple applications of the retention requirement could be conducive to practices circumventing the retention requirement and whether the rules on securitisations are enforced effectively by the competent authorities.
  59. Due diligence should be used in order to properly assess the risks arising from securitisation exposures for both the trading book and the non-trading book. In addition, due diligence obligations need to be proportionate. Due diligence procedures should contribute to building greater confidence between originators, sponsors and investors. It is therefore desirable that relevant information concerning the due diligence procedures is properly disclosed.
  60. When an institution incurs an exposure to its own parent undertaking or to other subsidiaries of its parent undertaking, particular prudence is necessary. The management of such exposures incurred by institutions should be carried out in a fully autonomous manner, in accordance with the principles of sound management, without regard to any other considerations. This is especially important in the case of large exposures and in cases not simply related to intragroup administration or usual intragroup transactions. Competent authorities should pay particular attention to such intragroup exposures. Such standards need not, however be applied where the parent undertaking is a financial holding company or a credit institution or where the other subsidiaries are either credit or financial institutions or undertakings offering ancillary services, provided that all such undertakings are covered by the supervision of the credit institution on a consolidated basis.
  61. In view of the risk-sensitivity of the rules relating to capital requirements, it is desirable to keep under review whether these have significant effects on the economic cycle. The Commission, taking into account the contribution of the European Central Bank (ECB), should report on these aspects to the European Parliament and to the Council.
  62. The capital requirements for commodity dealers, including those dealers currently exempt from the requirements of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments , should be reviewed.
  63. The goal of liberalisation of gas and electricity markets is both economically and politically important for the Union. With this in mind, the capital requirements and other prudential rules to be applied to firms active in those markets should be proportionate and should not unduly interfere with achievement of the goal of liberalisation. This goal should, in particular, be kept in mind when reviews of this Regulation are carried out.
  64. Institutions investing in re-securitisations should exercise due diligence also with regard to the underlying securitisations and the non-securitisation exposures ultimately underlying the former. Institutions should assess whether exposures in the context of asset-backed commercial paper programmes constitute re-securitisation exposures, including those in the context of programmes which acquire senior tranches of separate pools of whole loans where none of those loans is a securitisation or re-securitisation exposure, and where the first-loss protection for each investment is provided by the seller of the loans. In the latter situation, a pool- specific liquidity facility should generally not be considered a re-securitisation exposure because it represents a tranche of a single asset pool (that is, the applicable pool of whole loans) which contains no securitisation exposures. By contrast, a programme-wide credit enhancement covering only some of the losses above the seller-provided protection across the various pools generally would constitute a tranching of the risk of a pool of multiple assets containing at least one securitisation exposure, and would therefore be a re-securitisation exposure. Nevertheless, if such a programme funds itself entirely with a single class of commercial paper, and if either the programme-wide credit enhancement is not a re-securitisation or the commercial paper is fully supported by the sponsoring institution, leaving the commercial paper investor effectively exposed to the default risk of the sponsor instead of the underlying pools or assets, then that commercial paper generally should not be considered a re-securitisation exposure.
  65. The provisions on prudent valuation for the trading book should apply to all instruments measured at fair value, whether in the trading book or non- trading book of institutions. It should be clarified that, where the application of prudent valuation would lead to a lower carrying value than actually recognised in the accounting, the absolute value of the difference should be deducted from own funds.
  66. Institutions should have a choice whether to apply a capital requirement to or deduct from Common Equity Tier 1 items those securitisation positions that receive a 1 250 % risk weight under this Regulation, irrespective of whether the positions are in the trading or the non-trading book.
  67. Originator or sponsor institutions should not be able to circumvent the prohibition of implicit support by using their trading books in order to provide such support.
  68. Without prejudice to the disclosures explicitly required by this Regulation, the aim of the disclosure requirements should be to provide market participants with accurate and comprehensive information regarding the risk profile of individual institutions. Institutions should therefore be required to disclose additional information not explicitly listed in this Regulation where such disclosure is necessary to meet that aim. At the same time, competent authorities should pay appropriate attention to cases where they suspect that information is regarded as proprietary or confidential by an institution in order to avoid disclosure of such information.
  69. Where an external credit assessment for a securitisation position incorporates the effect of credit protection provided by the investing institution itself, the institution should not be able to benefit from the lower risk weight resulting from that protection. The securitisation position should not be deducted from capital if there are other ways to determine a risk weight in line with the actual risk of the position which does not take that credit protection into account.
  70. Given their recent weak performance, the standards for internal models to calculate market risk capital requirements should be strengthened. In particular, their capture of risks should be completed regarding credit risks in the trading book. Furthermore, capital charges should include a component adequate to stress conditions to strengthen capital requirements in view of deteriorating market conditions and in order to reduce the potential for pro-cyclicality. Institutions should also carry out reverse stress tests to examine what scenarios could challenge the viability of the institution unless they can prove that such a test is dispensable. Given the recent particular difficulties of treating securitisation positions using approaches based on internal models, the recognition of institutions' modelling of securitisation risks to calculate capital requirements in the trading book should be limited and a standardised capital charge for securitisation positions in the trading book should be required by default.
  71. This Regulation lays down limited exceptions for certain correlation trading activities, in accordance with which an institution may be permitted by its supervisor to calculate a comprehensive risk capital charge subject to strict requirements. In such cases the institution should be required to subject those activities to a capital charge equal to the higher of the capital charge in accordance with that internally developed approach and 8 % of the capital charge for specific risk in accordance with the standardised measurement method. It should not be required to subject those exposures to the incremental risk charge but they should be incorporated into both the value-at-risk measures and the stressed value-at-risk measures.
  72. In light of the nature and magnitude of unexpected losses experienced by institutions during the financial and economic crisis, it is necessary to improve further the quality and harmonisation of own funds that institutions are required to hold. This should include the introduction of a new definition of the core elements of capital available to absorb unexpected losses as they arise, enhancements to the definition of hybrid capital and uniform prudential adjustments to own funds. It is also necessary to raise significantly the level of own funds, including new capital ratios focusing on the core elements of own funds available to absorb losses as they arise. It is expected that institutions whose shares are admitted to trading on a regulated market should meet their capital requirements regarding the core elements of capital with such shares that meet a strict set of criteria for the core capital instruments and the disclosed reserves of the institution only. In order to adequately take into account the diversity of legal forms under which institutions within the Union are operating, the strict set of criteria for the core capital instruments should ensure that core capital instruments for institutions whose shares are not admitted to trading on a regulated market are of the highest quality. This should not prevent institutions from paying, on shares that have differentiated or no voting rights, distributions that are a multiple of those paid on shares which have relatively higher levels of voting rights, provided that, irrespective of the level of voting rights, the strict criteria for Common Equity Tier 1 instruments are met, including those relating to the flexibility of payments, and provided that where a distribution is paid it is to be paid on all shares issued by the institution concerned.
  73. Trade finance exposures are diverse in nature but share characteristics such as being small in value and short in duration and having an identifiable source of repayment. They are underpinned by movements of goods and services that support the real economy and in most cases help small companies in their day-to-day needs, thereby creating economic growth and job opportunities. Inflows and outflows are usually matched and liquidity risk is therefore limited.
  74. It is appropriate that EBA keeps an up-to-date list of all of the forms of capital instruments in each Member State that qualify as Common Equity Tier 1 instruments. EBA should remove from that list non-State aid instruments issued after the date of entry into force of this Regulation not meeting the criteria specified in this Regulation and should publicly announce such removal. Where instruments removed by EBA from the list continue to be recognised after EBA's announcement, EBA should fully exercise its powers, in particular those conferred by Article 17 of Regulation (EU) No 1093/2010 concerning breaches of Union law. It is recalled that a three-step mechanism applies for a proportionate response to instances of incorrect or insufficient application of Union law, whereby, as a first step, EBA is empowered to investigate alleged incorrect or insufficient application of Union law obligations by national authorities in their supervisory practice, concluded by a recommendation. Second, where the competent national authority does not follow the recommendation, the Commission is empowered to issue a formal opinion taking into account the EBA's recommendation, requiring the competent authority to take the actions necessary to ensure compliance with Union law. Third, to overcome exceptional situations of persistent inaction by the competent authority concerned, EBA is empowered, as a last resort, to adopt decisions addressed to individual financial institutions. Moreover, it is recalled that, under Article 258 TFEU, where the Commission considers that a Member State has failed to fulfil an obligation under the Treaties, it has the power to bring the matter before the Court of Justice of the European Union.
  75. This Regulation should not affect the ability of competent authorities to maintain pre-approval processes regarding the contracts governing Additional Tier 1 and Tier 2 capital instruments. In those cases such capital instruments should only be computed towards the institution's Additional Tier 1 capital or Tier 2 capital once they have successfully completed these approval processes.
  76. For the purposes of strengthening market discipline and enhancing financial stability it is necessary to introduce more detailed requirements for disclosure of the form and nature of regulatory capital and prudential adjustments made in order to ensure that investors and depositors are sufficiently well informed about the solvency of institutions.
  77. It is further necessary for competent authorities to have knowledge of the level, at least in aggregate terms, of repurchase agreements, securities lending and all forms of encumbrance of assets. Such information should be reported to the competent authorities. For the purposes of strengthening market discipline, there should be more detailed requirements for disclosure of repurchase agreements and secured funding.
  78. The new definition of capital and regulatory capital requirements should be introduced in a manner that takes account of the fact that there are different national starting points and circumstances, with initial variance around the new standards being reduced over the transitional period. In order to ensure the appropriate continuity in the level of own funds, instruments issued within the context of a recapitalisation measure pursuant to State aid rules and issued prior to the date of application of this Regulation will be grandfathered for the extent of the transitional period. Reliance on State aid should be reduced as much as possible in the future. However, to the extent that State aid proves necessary in certain situations, this Regulation should provide for a framework to deal with such situations. In particular, this Regulation should specify what should be the treatment for own funds instruments issued within the context of a recapitalisation measure pursuant to State aid rules. The possibility for institutions to benefit from such treatment should be subject to strict conditions. Furthermore, to the extent that such treatment allows for deviations from the new criteria on the quality of own funds instruments those deviations should be limited to the largest extent possible. The treatment for existing capital instruments issued within the context of a recapitalisation measure pursuant to State aid- rules, should clearly distinguish between those capital instruments that comply with the requirements of this Regulation and those that do not. Appropriate transitional provisions for the latter case should therefore be laid down in this Regulation.
  79. Directive 2006/48/EC required credit institutions to provide own funds that are at least equal to specified minimum amounts until 31 December 2011 . In the light of the continuing effects of the financial crisis in the banking sector and the extension of the transitional arrangements for capital requirements adopted by the BCBS, it is appropriate to reintroduce a lower limit for a limited period of time until sufficient amounts of own funds have been established in accordance with the transitional arrangements for own funds provided for in this Regulation that will be progressively phased in from the date of application of this Regulation to 2019.
  80. For groups which include significant banking or investment business and insurance business, Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate , provides specific rules to address such double counting of capital. Directive 2002/87/EC is based on internationally agreed principles for dealing with risk across sectors. This Regulation strengthens the way those financial conglomerates rules shall apply to bank and investment firm groups, ensuring their robust and consistent application. Any further changes that are necessary will be addressed in the review of Directive 2002/87/EC, which is expected in 2015.
  81. The financial crisis highlighted that institutions greatly underestimated the level of counterparty credit risk associated with over-the-counter (OTC) derivatives. This prompted the G-20, in September 2009, to call for more OTC derivatives to be cleared through a central counterparty (CCP). Furthermore, they asked for those OTC derivatives that could not be cleared centrally to be subject to higher own funds requirements in order to properly reflect the higher risks associated with them.
  82. Following the G-20 call, the BCBS, as part of the Basel III framework, materially changed the counterparty credit risk regime. The Basel III framework is expected to significantly increase the own funds requirements associated with institutions' OTC derivatives and securities financing transactions and to create important incentives for institutions to use CCPs. The Basel III framework is also expected to provide further incentives to strengthen the risk management of counterparty credit exposures and to revise the current regime for the treatment of counterparty credit risk exposures to CCPs.
  83. Institutions should hold additional own funds due to credit valuation adjustment risk arising from OTC derivatives. Institutions should also apply a higher asset value correlation in the calculation of the own funds requirements for counterparty credit risk exposures arising from OTC derivatives and securities-financing transactions to certain financial institutions. Institutions should also be required to considerably improve measurement and management of counterparty credit risk by better addressing wrong-way risk, highly leveraged counterparties and collateral, accompanied by the corresponding enhancements in the areas of back-testing and stress testing.
  84. Trade exposures to CCPs usually benefit from the multilateral netting and loss-sharing mechanism provided by CCPs. As a consequence, they involve a very low counterparty credit risk and should therefore be subject to a very low own funds requirement. At the same time, this requirement should be positive in order to ensure that institutions track and monitor their exposures to CCPs as part of good risk management and to reflect that even trade exposures to CCPs are not risk-free.
  85. A CCP's default fund is a mechanism that allows the sharing (mutualisation) of losses among the CCP's clearing members. It is used where the losses incurred by the CCP following the default of a clearing member are greater than the margins and default fund contributions provided by that clearing member and any other defence the CCP may use before recurring to the default fund contributions of the remaining clearing members. In view of this, the risk of loss associated with exposures from default fund contributions is higher than that associated with trade exposures. Therefore, this type of exposures should be subject to a higher own funds requirement.
  86. The hypothetical capital of a CCP should be a variable needed to determine the own funds requirement for a clearing member's exposures from its contributions to a CCP's default fund. It should not be understood as anything else. In particular, it should not be understood as the amount of capital that a CCP is required to hold by its competent authority.
  87. The review of the treatment of counterparty credit risk, and in particular putting in place higher own funds requirements for bilateral derivative contracts in order to reflect the higher risk that such contracts pose to the financial system, forms an integral part of the Commission's efforts to ensure efficient, safe and sound derivatives markets. Consequently, this Regulation complements Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories .
  88. The Commission should review the relevant exemptions for large exposures by 31 December 2015 . Pending the outcome of that review, Member States should continue being allowed to decide on the exemption of certain large exposures from those rules for a sufficiently long transitional period. Building on the work done in the context of the preparation and negotiation of Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management and taking into account international and Union developments on those issues, the Commission should review whether those exemptions should continue to be applied in a discretionary or in a more general way and on whether the risks related to those exposures are addressed by other effective means laid down in this Regulation.
  89. In order to ensure that exemptions of exposures by competent authorities do not jeopardise the coherence of the uniform rules established by this Regulation on a permanent basis, after a transitional period, and in the absence of any outcome of that review, the competent authorities should consult EBA on whether or not it is appropriate to continue making use of the possibility to exempt certain exposures.
  90. The years preceding the financial crisis were characterised by an excessive build up in institutions' exposures in relation to their own funds (leverage). During the financial crisis, losses and the shortage of funding forced institutions to reduce significantly their leverage over a short period of time. This amplified downward pressures on asset prices, causing further losses for institutions which in turn led to further declines in their own funds. The ultimate results of this negative spiral were a reduction in the availability of credit to the real economy and a deeper and longer crisis.
  91. Risk-based own funds requirements are essential to ensure sufficient own funds to cover unexpected losses. However, the crisis has shown that those requirements alone are not sufficient to prevent institutions from taking on excessive and unsustainable leverage risk.
  92. In September 2009, the G-20 leaders committed to developing internationally-agreed rules to discourage an excessive leverage. To that end, they supported the introduction of a leverage ratio as a supplementary measure to the Basel II framework.
  93. In December 2010, the BCBS published guidelines defining the methodology for calculating the leverage ratio. Those rules provide for an observation period that will run from 1 January 2013 until 1 January 2017 during which the leverage ratio, its components and its behaviour relative to the risk-based requirement will be monitored. Based on the results of the observation period the BCBS intends to make any final adjustments to the definition and calibration of the leverage ratio in the first half of 2017, with a view to migrating to a binding requirement on 1 January 2018 based on appropriate review and calibration. The BCBS guidelines also provide for disclosure of the leverage ratio and its components starting from 1 January 2015 .
  94. A leverage ratio is a new regulatory and supervisory tool for the Union. In line with international agreements, it should be introduced first as an additional feature that can be applied on individual institutions at the discretion of supervisory authorities. Reporting obligations for institutions would allow appropriate review and calibration, with a view to migrating to a binding measure in 2018.
  95. When reviewing the impact of the leverage ratio on different business models, particular attention should be paid to business models which are considered to entail low risk, such as mortgage lending and specialised lending to regional governments, local authorities or public sector entities. EBA, on the basis of data received and the findings of the supervisory review during an observation period, should in cooperation with competent authorities develop a classification of business models and risks. Based on appropriate analysis, and also taking into account historical data or stress scenarios, there should be an assessment of the appropriate levels of the leverage ratio that safeguard the resilience of the respective business models and whether the levels of the leverage ratio should be set as thresholds or ranges. After the observation period and the calibration of the respective levels of the leverage ratio, and on the basis of the assessment, EBA can publish an appropriate statistical review, including averages and standard deviations, of the leverage ratio. After adoption of the leverage ratio requirements, EBA should publish an appropriate statistical review, including averages and standard deviations, of the leverage ratio in relation to the identified categories of institutions.
  96. Institutions should monitor the level and changes in the leverage ratio as well as leverage risk as part of the internal capital adequacy assessment process (ICAAP). Such monitoring should be included in the supervisory review process. In particular, after the entry into force of the leverage ratio requirements, competent authorities should monitor the developments in the business model and corresponding risk profile in order to ensure up to date and proper classification of institutions.
  97. Good governance structures, transparency and disclosure are essential for sound remuneration policies. In order to ensure adequate transparency to the market of their remuneration structures and the associated risk, institutions should disclose detailed information on their remuneration policies, practices and, for reasons of confidentiality, aggregated amounts for those members of staff whose professional activities have a material impact on the risk profile of the institution. That information should be made available to all stakeholders. Those particular requirements should be without prejudice to more general disclosure requirements concerning remuneration policies applicable horizontally across sectors. Moreover, Member States should be allowed to require institutions to make available more detailed information on remuneration.
  98. The recognition of a credit rating agency as an external credit assessment institution (ECAI) should not increase the foreclosure of a market already dominated by three main undertakings. EBA and ESCB central banks, without making the process easier or less demanding, should provide for the recognition of more credit rating agencies as ECAIs as a way to open the market to other undertakings.
  99. Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data and Regulation (EC) No 45/2001 of the European Parliament and of the Council of 18 December 2000 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data , should be fully applicable to the processing of personal data for the purposes of this Regulation.
  100.  Institutions should hold a diversified buffer of liquid assets that they can use to cover liquidity needs in a short term liquidity stress. As it is not possible to know ex ante with certainty which specific assets within each asset class might be subject to shocks ex post, it is appropriate to promote a diversified and high-quality liquidity buffer consisting of different asset categories. A concentration of assets and overreliance on market liquidity creates systemic risk to the financial sector and should be avoided. A broad set of quality assets should therefore be taken into consideration during an initial observation period which will be used for the development of a definition of a liquidity coverage requirement. When making a uniform definition of liquid assets at least government bonds, and covered bonds traded on transparent markets with an ongoing turnover would be expected to be considered assets of extremely high liquidity and credit quality. It would also be appropriate that assets corresponding to Article 416(1)(a) to (c) should be included in the buffer without limitations. When institutions use the liquidity stock, they should put in place a plan to restore their holdings of liquid assets and competent authorities should ensure the adequacy of the plan and its implementation.
  101.  The stock of liquid assets should be available at any time to meet the liquidity outflows. The level of liquidity needs in a short-term liquidity stress should be determined in a standardised manner so as to ensure a uniform soundness standard and a level playing field. It should be ensured that such a standardised determination has no unintended consequences for financial markets, credit extension and economic growth, also taking into account different business and investment models and funding environments of institutions across the Union. To this end, the liquidity coverage requirement should be subject to an observation period. Based on the observations and supported by reports from EBA, the Commission should be empowered to adopt a delegated act to introduce in a timely manner a detailed and harmonised liquidity coverage requirement for the Union. In order to ensure global harmonisation in the area of regulation of liquidity any delegated act to introduce the liquidity coverage requirement should be comparable to the liquidity coverage ratio set out in the final international framework for liquidity risk measurement, standards and monitoring of the BCBS taking into account Union and national specificities.
  102.  To that end, during the observation period, EBA should review and assess, inter alia the appropriateness of a threshold of 60 % on level 1 liquid assets, a cap of 75 % of inflows to outflows and the phase-in of the liquidity coverage requirement from 60 % from 1 January 2015 increasing on a graduated basis to 100 %. When assessing and reporting on the uniform definitions of the stock of liquid assets, EBA should have regard to the BCBS definition of high-quality liquid assets (HQLA) for the basis of its analysis, taking Union and national specificities into account. While EBA should identify those currencies where the needs of institutions established in the Union for liquid assets exceeds the availability of those liquid assets in that currency, EBA should also annually examine whether derogations, including those identified in this Regulation, should be applied. In addition, EBA should assess annually whether in relation to any such derogation as well as derogations already identified in this Regulation, any additional conditions should be attached to their use by institutions established in the Union or whether existing conditions should be revised. EBA should submit the results of its analysis in an annual report to the Commission.
  103.  With a view to increasing efficiency and reducing the administrative burden, EBA should set up a coherent reporting framework on the basis of a harmonised set of standards for liquidity requirements that should be applied across the Union. To this end, EBA should develop uniform reporting formats and IT solutions that take into account the provisions of this Regulation and Directive 2013/36/EU. Until the date of application of the full liquidity requirements, institutions should continue to meet their national reporting requirements.
  104.  EBA, in cooperation with the ESRB, should issue guidance on the principles for use of liquid stock in a stress situation.
  105.  It should not be taken for granted that institutions will receive liquidity support from other institutions belonging to the same group when they experience difficulties in meeting their payment obligations. However, subject to stringent conditions and the individual agreement of all competent authorities involved, competent authorities should be able to waive the application of the liquidity requirement for individual institutions and subject those institutions to a consolidated requirement, in order to allow them to manage their liquidity centrally at group or sub-group level.
  106.  In the same vein, where no waiver is granted, liquidity flows between two institutions belonging to the same group and which are subject to consolidated supervision, should, when the liquidity requirement becomes a binding measure, receive preferential inflow and outflow rates only in those cases where all the necessary safeguards are in place. Such specific preferential treatments should be narrowly defined and linked to the fulfilment of a number of stringent and objective conditions. The specific treatment applicable to a given intragroup flow should be obtained through a methodology using objective criteria and parameters in order to determine specific levels of inflows and outflows between the institution and the counterparty. Based on the observations and supported by the EBA report, the Commission should, as appropriate and as part of the delegated act which it adopts pursuant to this Regulation to specify the liquidity coverage requirement, be empowered to adopt delegated acts to lay down those specific intragroup treatments, the methodology and the objective criteria to which they are linked as well as joint decision modalities for the assessment of those criteria.
  107.  Bonds issued by the National Asset Management Agency (NAMA) in Ireland are of particular importance to the Irish banking recovery and their issue has been granted prior approval by the Member States, and approved as a State aid by the Commission as a support measure introduced to remove impaired assets from the balance sheets of certain credit institutions. The issuance of such bonds, a transitional measure supported by the Commission and the ECB, is an integral part in the restructuring of the Irish banking system. Such bonds are guaranteed by the Irish government and are eligible collateral with monetary authorities. The Commission should address specific grandfathering mechanisms of transferable assets issued or guaranteed by entities with Union State aid approval, as part of the delegated act which it adopts pursuant to this Regulation to specify the liquidity coverage requirement. In that regard the Commission should take into account the fact that institutions calculating the liquidity coverage requirements in accordance with this Regulation should be permitted to include NAMA senior bonds as assets of extremely high liquidity and credit quality until December 2019.
  108.  Similarly, the bonds issued by the Spanish Asset Management Company are of particular importance to the Spanish banking recovery and are a transitional measure supported by the Commission and the ECB, as an integral part in the restructuring of the Spanish banking system. Since their issuance is provided for in the Memorandum of Understanding on Financial Sector Policy Conditionality signed by the Commission and the Spanish Authorities on 23 July 2012 , and the transfer of assets requires approval by the Commission as a State aid measure introduced to remove impaired assets from the balance sheets of certain credit institutions, and to the extent they are guaranteed by the Spanish government and are eligible collateral with monetary authorities. The Commission should address specific grandfathering mechanisms of transferable assets issued or guaranteed by entities with Union State aid approval as part of the delegated act which it adopts pursuant to this Regulation to specify the liquidity coverage requirement. In that regard the Commission should take into account the fact that institutions calculating the liquidity coverage requirements in accordance with this Regulation should be permitted to include Spanish Asset Management Company senior bonds as assets of extremely high liquidity and credit quality until at least December 2023.
  109.  On the basis of the reports which EBA is required to submit and when preparing the proposal for a delegated act on liquidity requirements, the Commission should also consider if senior bonds issued by legal entities similar to NAMA in Ireland or the Spanish Asset Management Company, established for the same purpose and of particular importance for bank recovery in any other Member State, should be granted such treatment, to the extent they are guaranteed by the central government of the relevant Member State and are eligible collateral with monetary authorities.
  110.  In developing draft regulatory technical standards to determine methods for the measurement of additional outflow, EBA should consider a historical look back standardised approach as a method of such measurement.
  111.  Pending the introduction of the net stable funding ratio (NSFR) as a binding minimum standard, institutions should observe a general funding obligation. The general funding obligation should not be a ratio requirement. If, pending the introduction of the NSFR, a stable funding ratio is introduced as a minimum standard by way of a national provision, institutions should comply with this minimum standard accordingly.
  112.  Apart from short-term liquidity needs, institutions should also adopt funding structures that are stable over a longer term horizon. In December 2010, the BCBS agreed that the NSFR will move to a minimum standard by 1 January 2018 and that the BCBS will put in place rigorous reporting processes to monitor the ratio during a transitional period and will continue to review the implications of these standards for financial markets, credit extension and economic growth, addressing unintended consequences as necessary. The BCBS thus agreed that the NSFR will be subject to an observation period and will include a review clause. In that context, EBA should, based on reporting required by this Regulation, evaluate how a stable funding requirement should be designed. Based on this evaluation, the Commission should report to the European Parliament and the Council together with any appropriate proposals in order to introduce such a requirement by 2018.
  113.  Weaknesses in corporate governance in a number of institutions have contributed to excessive and imprudent risk-taking in the banking sector which led to the failure of individual institutions and systemic problems.
  114.  In order to facilitate the monitoring of institutions' corporate governance practices and improve market discipline, institutions should publicly disclose their corporate governance arrangements. Their management bodies should approve and publicly disclose a statement providing assurance to the public that these arrangements are adequate and efficient.
  115.  In order to take account of the diversity of business models of institutions in the internal market certain long-term structural requirements such as the NSFR and the leverage ratio should be examined closely with a view of promoting a variety of sound banking structures which have been and should continue to of service to the Union's economy.
  116.  For the continuous provision of financial services to households and firms a stable funding structure is necessary. Long-term funding flows in bank-based financial systems in many Member States may generally possess different characteristics than those found in other international markets. In addition, specific funding structures may have developed in Member States to provide stable financing for long-term investment, including decentralised banking structures to channel liquidity or specialised mortgage securities which trade on highly liquid markets or are a welcome investment for long-term investors. Those structural factors should be carefully considered. It is essential to that purpose that, once international standards are finalised, EBA and the ESRB, based on reporting required by this Regulation, evaluate how a stable funding requirement should be designed fully taking into account the diversity of funding structures in the banking market in the Union.
  117.  In order to ensure progressive convergence between the level of own funds and the prudential adjustments applied to the definition of own funds across the Union and to the definition of own funds laid down in this Regulation during a transitional period, the phasing in of the own funds requirements of this Regulation should occur gradually. It is vital to ensure that this phasing in is consistent with the recent enhancements made by Member States to the required levels of own funds and to the definition of own funds in place in the Member States. To that end, during the transitional period the competent authorities should determine within defined lower and upper limits how rapidly to introduce the required level of own funds and prudential adjustments laid down in this Regulation.
  118.  In order to facilitate a smooth transition from divergent prudential adjustments currently applied in Member States to the set of prudential adjustments laid down in this Regulation, competent authorities should be able during a transitional period to continue to require institutions, to a limited extent, to make prudential adjustments to own funds that derogate from this Regulation.
  119.  In order to ensure that institutions have sufficient time to meet the new required levels and definition of own funds, certain capital instruments that do not comply with the definition of own funds laid down in this Regulation should be phased out between 1 January 2013 and 31 December 2021 . In addition, certain state-injected instruments should be recognised fully in own funds for a limited period. Furthermore, share premium accounts related to items that qualified as own funds under national transposition measures for Directive 2006/48/EC should under certain circumstances qualify as Common Equity Tier 1.
  120.  In order to ensure progressive convergence towards uniform rules on disclosure by institutions to provide market participants with accurate and comprehensive information regarding the risk profile of individual institutions, disclosure requirements should be phased in gradually.
  121.  In order to take account of market developments and experience in the application of this Regulation, the Commission should be required to submit reports to the European Parliament and to the Council, together with legislative proposals, where appropriate, on the possible effect of capital requirements on the economic cycle of minimum own funds requirements for exposures in the form of covered bonds, large exposures, liquidity requirements, leverage, exposures to transferred credit risk, counterparty credit risk and the original exposure method, retail exposures, on the definition of eligible capital, and the level of application of this Regulation.
  122.  The primary purpose of the legal framework for credit institutions should be to ensure the operation of vital services to the real economy while limiting the risk of moral hazard. The structural separation of retail and investment banking activities within a banking group could be one of the key tools to support this objective. No provision in the current regulatory framework should therefore prevent the introduction of measures to effect such a separation. The Commission should be required to analyse the issue of structural separation in the Union and submit a report, together with legislative proposals, if appropriate, to the European Parliament and the Council.
  123.  Similarly, with a view to protecting depositors and preserving financial stability, Member States should also be permitted to adopt structural measures that require credit institutions authorised in that Member State to reduce their exposures to different legal entities depending on their activities, irrespective of where those activities are located. However, because such measures could have a negative impact by fragmenting the internal market, they should only be approved subject to strict conditions pending the entry into force of a future legal act explicitly harmonising such measures.
  124.  In order to specify the requirements set out in this Regulation, the power to adopt acts in accordance with Article 290 TFEU should be delegated to the Commission in respect of technical adjustments to this Regulation to clarify definitions to ensure uniform application of this Regulation or to take account of developments on financial markets, to align terminology on, and frame definitions in accordance with, subsequent relevant acts, to adjust the provisions of this Regulation on own funds to reflect developments in accounting standards or Union law, or with regard to the convergence of supervisory practices, to expand the lists of exposure classes for the purposes of the Standardised Approach or the IRB Approach to take account of developments on financial markets, to adjust certain amounts relevant to those exposure classes to take into account the effects of inflation; to adjust the list and classification of off- balance sheet items and to adjust specific provisions and technical criteria on the treatment of counterparty credit risk, the Standardised Approach and the IRB Approach, credit risk mitigation, securitisation, operational risk, market risk, liquidity, leverage and disclosure in order to take account of developments on financial markets or in accounting standards or Union law, or with regard to the convergence of supervisory practices and risk measurement and to take account of the outcome of the review of various matters relating to the scope of Directive 2004/39/EC.
  125.  The power to adopt acts in accordance with Article 290 TFEU should also be delegated to the Commission in respect of prescribing a temporary reduction in the level of own funds or risk weights specified under this Regulation in order to take account of specific circumstances, to clarify the exemption of certain exposures from the application of provisions of this Regulation on large exposures, to specify amounts relevant to the calculation of capital requirements for the trading book to take account of developments in the economic and monetary field, to adjust the categories of investment firms eligible for certain derogations from required levels of own funds to take account of developments on financial markets, to clarify the requirement that investment firms hold own funds equivalent to one quarter of their fixed overheads of the preceding year to ensure uniform application of this Regulation, to determine the elements of own funds from which deductions of an institution's holdings of the instruments of relevant entities should be made, to introduce additional transitional provisions relating to the treatment of actuarial gains and losses in measuring defined benefit pension liabilities of institutions. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level. The Commission, when preparing and drawing up delegated acts, should ensure a simultaneous, timely and appropriate transmission of relevant documents to the European Parliament and to the Council.
  126.  In accordance with Declaration No 39 on Article 290 TFEU, the Commission should continue to consult experts appointed by the Member States in the preparation of draft delegated acts in the financial services area, in accordance with its established practice.
  127.  Technical standards in financial services should ensure harmonisation, uniform conditions and adequate protection of depositors, investors and consumers across the Union. As a body with highly specialised expertise, it would be efficient and appropriate to entrust EBA with the elaboration of draft regulatory and implementing technical standards which do not involve policy choices, for submission to the Commission. EBA should ensure efficient administrative and reporting processes when drafting technical standards. The reporting formats should be proportionate to the nature, scale and complexity of the activities of the institutions.
  128.  The Commission should adopt draft regulatory technical standards developed by EBA in the areas of mutuals, cooperative societies, savings institutions or similar institutions, certain own funds instruments, prudential adjustments, deductions from own funds, additional own funds instruments, minority interests, services ancillary to banking, the treatment of credit risk adjustment, probability of default, loss given default, approaches to risk-weighting of assets, convergence of supervisory practices, liquidity, and transitional arrangements for own funds, by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level. The Commission and EBA should ensure that those standards and requirements can be applied by all institutions concerned in a manner that is proportionate to the nature, scale and complexity of those institutions and their activities.
  129.  The implementation of some delegated acts provided for in this Regulation, such as the delegated act concerning the liquidity coverage requirement, may potentially have a substantial impact on supervised institutions and the real economy. The Commission should ensure that the European Parliament and the Council are always well informed about relevant developments at international level and current thinking within the Commission well before the publication of delegated acts.
  130.  The Commission should also be empowered to adopt implementing technical standards developed by EBA with regard to consolidation, joint decisions, reporting, disclosure, exposures secured by mortgages, risk assessment, approaches to risk-weighting of assets, risk-weights and specification of certain exposures, the treatment of options and warrants, positions in equity instruments and foreign exchange, the use of internal models, leverage, and off-balance sheet items by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1093/2010.
  131.  Given the detail and number of regulatory technical standards that are to be adopted pursuant to this Regulation, where the Commission adopts a regulatory technical standard which is the same as the draft regulatory technical standard submitted by EBA, the period within which the European Parliament or the Council may object to a regulatory technical standard, should, where appropriate, be further extended by one month. Moreover, the Commission should aim to adopt the regulatory technical standards in good time to permit the European Parliament and the Council to exercise full scrutiny, taking account of the volume and complexity of regulatory technical standards and the details of the European Parliament's and the Council's rules of procedure, calendar of work and composition.
  132.  In order to ensure a high degree of transparency, EBA should launch consultations relating to the draft technical standards referred to in this Regulation. EBA and the Commission should start preparing their reports on liquidity requirements and leverage, as provided for in this Regulation, as soon as possible.
  133.  In order to ensure uniform conditions for the implementation of this Regulation, implementing powers should be conferred on the Commission. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council of 16 February 2011 laying down the rules and general principles concerning mechanisms for control by the Member States of the Commission's exercise of implementing powers .
  134.  In accordance with Article 345 TFEU, which provides that the Treaties are in no way to prejudice the rules in Member States governing the system of property ownership, this Regulation neither favours nor discriminates against types of ownership which are within its scope.
  135.  The European Data Protection Supervisor has been consulted in accordance with Article 28(2) of Regulation (EC) No 45/2001 and has adopted an opinion .
  136.   Regulation (EU) No 648/2012 should be amended accordingly,

HAVE ADOPTED THIS REGULATION:

 

PART ONE

GENERAL PROVISIONS

TITLE I

SUBJECT MATTER, SCOPE AND DEFINITIONS

Article 1

Scope

This Regulation lays down uniform rules concerning general prudential requirements that institutions, financial holding companies set up in Gibraltar, and mixed financial holding companies set up in Gibraltar shall comply with in relation to the following items:

  1. own funds requirements relating to entirely quantifiable, uniform and standardised elements of credit risk, market risk, operational risk, settlement risk and leverage;
  2. equirements limiting large exposures;
  3. iquidity requirements relating to entirely quantifiable, uniform and standardised elements of liquidity risk;
  4. eporting requirements related to points (a), (b) and (c);
  5. ublic disclosure requirements.

This Regulation lays down uniform rules concerning the own funds and eligible liabilities requirements that resolution entities that are global systemically important institutions (G-SIIs) or part of G-SIIs and material subsidiaries of third-country G-SIIs shall comply with.

 

Article 2

Supervisory powers 

1. For the purpose of ensuring compliance with this Regulation, the GFSA shall have the powers and shall follow the procedures set out in the Act and the CICR Regulations and in this Regulation.

2. For the purpose of ensuring compliance with this Regulation, the Gibraltar Resolution Authority shall have the powers and shall follow the procedures set out in this Regulation, the Act and the Recovery and Resolution Regulations and in this Regulation.

3. The GFSC and the Gibraltar Resolution Authority shall cooperate for the purpose of ensuring compliance with the requirements concerning own funds and eligible liabilities.

4. The GFSC must treat investment firms to which regulation 4(3) and (4) or 4(7) of the IFPR Regulations apply as if they were institutions under this Regulation.

 

Article 3

Application of stricter requirements by institutions

This Regulation shall not prevent institutions from holding own funds and their components in excess of, or applying measures that are stricter than those required by this Regulation.

 

Article 4

Definitions

1. For the purposes of this Regulation, the following definitions shall apply:

  1. “credit institution” means an undertaking the business of which consists of any of the following:

    (a)   to take deposits or other repayable funds from the public and to grant credits for its own account;

    (b)  to carry out any of the activities in paragraphs 50 and 53 of Schedule 2 to the Act, where one of the following applies, but the undertaking is not a commodity and emission allowance dealer, a collective investment undertaking or an insurance undertaking:

           (i)     the total value of the consolidated assets of the undertaking is €30 billion or more;

          (ii)   the total value of the assets of the undertaking is less than €30 billion, and the undertaking is part of a group in which the total value of the consolidated assets of all undertakings in that group that individually have total assets of less than €30 billion and that carry out any of the activities in paragraphs 50 and 53 of Schedule 2 to the Act is €30 billion or more; or

        (iii)    the total value of the assets of the undertaking is less than €30 billion, and the undertaking is part of a group in which the total value of the consolidated assets of all undertakings in the group that carry out any of the activities in paragraphs 50 and 53 of Schedule 2 to the Act is €30 billion or more, where the GFSC so decides in order to address potential risks of circumvention and potential risks for the financial stability of Gibraltar.

    For the purposes of points (b)(ii) and (b)(iii), where the undertaking is part of a third-country group, the total assets of each branch of the third-country group authorised Gibraltar must be included in the combined total value of the assets of all undertakings in the group;

  2. “investment firm” means an investment firm within the meaning of the Act, but does not include a credit institution;

  3. “institution” means a credit institution with Part 7 permission given in accordance with regulation 8 of the CICR Regulations or an undertaking to which regulation 16C(4) of the CICR Regulations applies, and includes an investment firm to which Article 2.4 applies;
  4. Omitted
  5. ‘insurance undertaking’ has the meaning given in regulation 3(1) of the Financial Services (Insurance Companies) Regulations 2020;
  6. ‘reinsurance undertaking’ has the meaning given in regulation 3(1) of the Financial Services (Insurance Companies) Regulations 2020;
  7. ‘collective investment undertaking’ or ‘CIU’ means a UCITS within the meaning of Part 18 of the Act or an alternative investment fund (AIF) within the meaning of the Act;
  8. public sector entity means a non-commercial administrative body responsible to central governments, regional governments or local authorities, or to authorities that exercise the same responsibilities as regional governments and local authorities, or a non-commercial undertaking that is owned by or set up and sponsored by central governments, regional governments or local authorities, and that has explicit guarantee arrangements, and may include self-administered bodies governed by law that are under public supervision;
  9. ‘management body’ means an institution's body, which is appointed in accordance with national law, which is empowered to set the institution's strategy, objectives and overall direction, and which oversees and monitors management decision-making, and includes the persons who effectively direct the business of the institution;

    (9A) ‘management body in its supervisory function’ means the management body acting in its role of overseeing and monitoring management decision-making;

  10. ‘senior management’ means those individuals who exercise executive functions within an institution and who are responsible, and accountable to the management body, for the day-to-day management of the institution;
  11. ‘systemic risk’ means a risk of disruption in the financial system of Gibraltar with the potential to have serious negative consequences for the financial system and the real economy of Gibraltar;
  12. ‘model risk’ means the potential loss an institution may incur as a consequence of decisions that could be principally based on the output of internal models due to errors in the development, implementation or use of such models;
  13. ‘originator’ has the meaning given in Article 2(3) of the Securitisation Regulation;
  14. ‘sponsor’ has the meaning given in Article 2(5) of the Securitisation Regulation;

    (14a) ‘original lender’ has the meaning given in Article 2(20) of the Securitisation Regulation;

  15. parent undertaking means

    (a)   a parent undertaking within the meaning of section 276 of the Companies Act 2014; or 

    (b)  for the purposes of Part 5 of this Regulation–

          (i)    a parent undertaking within the meaning of section 276 of the Companies Act 2014, apart from the meaning given in subsection (4); or

         (ii)    an undertaking which effectively exercises a dominant influence over another undertaking,

    where section 276(5) of the Companies Act 2014 applies to parent undertakings falling within point (b)(ii) as it applies to parent undertakings falling within section 276
    ;

  16. subsidiary means

    (a)   a subsidiary undertaking within the meaning of section 276 of the Companies Act 2014; or 

    (b)   for the purposes of Part 5 of this Regulation–

          (i)    a subsidiary undertaking within the meaning of section 276 of the Companies Act 2014, apart from the meaning given in subsection (4); or

         (ii)    an undertaking over which another undertaking effectively exercises a dominant influence,

    where section 276(5) of the Companies Act 2014 applies to subsidiaries falling within point (b)(ii) as it applies to subsidiaries falling within section 276
    ;

  17. branch means a place of business which forms a legally dependent part of an institution and which carries out directly all or some of the transactions inherent in the business of institutions;
  18. ancillary services undertaking means an undertaking the principal activity of which consists of owning or managing property, managing data-processing services, or a similar activity which is ancillary to the principal activity of one or more institutions;
  19. ‘asset management company’ means a person who has Part 7 permission to carry on the regulated activity of–

    (a)   managing a UCITS (as specified in paragraph 93 of Schedule 2 to the Act), or would require that permission if its registered office were located in Gibraltar;

    (b)   managing an AIF (as specified in paragraph 95 of Schedule 2 to the Act), or would require that permission if its registered office were located in Gibraltar; or

    (c)   managing a small AIF (as specified in paragraph 97 of Schedule 2 to the Act), or would require that permission if its registered office were located in Gibraltar; including, unless otherwise provided, a third-country entity that carries out similar activities and is subject to the laws of a third country which applies supervisory and regulatory requirements at least equivalent to those applied in Gibraltar;

  20. financial holding company means a financial institution, the subsidiaries of which are exclusively or mainly institutions or financial institutions, and which is not a mixed financial holding company; the subsidiaries of a financial institution are mainly institutions or financial institutions where at least one of them is an institution and where more than 50 % of the financial institution's equity, consolidated assets, revenues, personnel or other indicator considered relevant by the competent authority are associated with subsidiaries that are institutions or financial institutions;
  21. ‘mixed financial holding company’ means a parent undertaking which–

    (a) is not a regulated entity;

    (b) has at least one subsidiary which is a regulated entity and has its head office in Gibraltar; and

    (c) together with its subsidiaries and other entities, constitutes a financial conglomerate;
  22. mixed activity holding company means a parent undertaking, other than a financial holding company or an institution or a mixed financial holding company, the subsidiaries of which include at least one institution;
  23. ‘third-country insurance undertaking’ has the meaning given in regulation 3(1) of the Financial Services (Insurance Companies) Regulations 2020;
  24. ‘third-country reinsurance undertaking’ has the meaning given in regulation 3(1) of the Financial Services (Insurance Companies) Regulations 2020;
  25. ‘third-country investment firm’ means a firm which: 

    (a)   would be an investment firm if it were established in Gibraltar; 

    (b)   is authorised in a third country; and 

    (c)   is subject to and complies with prudential rules which the GFSC considers to be at least as stringent as those under this Regulation or the CICR Regulations;

  26. “financial institution” means an undertaking other than an institution or a pure industrial holding company, the principal activity of which is to acquire holdings or to pursue one or more of the activities listed in points 2 to 12 and 15 of the Schedule to the CICR Regulations, including an investment firm, a financial holding company, a mixed financial holding company, an investment holding company, a payment institution (within the meaning of regulation 2 of the Financial Services (Payment Services) Regulations 2020) or an asset management company, but excluding insurance holding companies and mixed-activity insurance holding companies within the meaning of regulation 191 of the Financial Services (Insurance Companies) Regulations 2020;
  27. financial sector entity means any of the following:

    (a)   an institution;

    (b)   a financial institution;

    (c)   an ancillary services undertaking included in the consolidated financial situation of an institution;

    (d)   an insurance undertaking;

    (e)   a third-country insurance undertaking;

    (f)   a reinsurance undertaking;

    (g)   a third-country reinsurance undertaking;

    (h)   an insurance holding company within the meaning of regulation 191 of the Financial Services (Insurance Companies) Regulations 2020;

    (k)   an undertaking excluded from the scope of the Financial Services (Insurance Companies) Regulations 2020 in accordance with regulation 5 of those Regulations;

    (l)   a third-country undertaking with a main business comparable to any of the entities referred to in points (a) to (k);

  28. ‘Gibraltar parent institution’ means an institution in Gibraltar:

    (a)   which:

         (i)   has an institution, a financial institution or an ancillary services undertaking as a subsidiary; or

        (ii)   holds a participation in an institution, financial institution or ancillary services undertaking; and

    (b)   which is not a subsidiary of:

         (i)   another institution authorised in Gibraltar; or

        (ii)   a financial holding company or mixed financial holding company set up in Gibraltar;

  29. Omitted

    (29a) “Gibraltar parent investment firm” means a Gibraltar parent undertaking that is an investment firm;

    (29b) Omitted

    (29c) ‘Gibraltar parent credit institution’ means a Gibraltar parent institution that is a credit institution;

  30. ‘Gibraltar parent financial holding company’ means a financial holding company which is not a subsidiary of an institution authorised in Gibraltar or of a financial holding company or mixed financial holding company set up in Gibraltar;
  31. Omitted
  32. ‘Gibraltar parent mixed financial holding company’ means a mixed financial holding company which is not a subsidiary of an institution authorised in Gibraltar, or of a financial holding company or mixed financial holding company set up in Gibraltar;
  33. Omitted;
  34. central counterparty or CCP means a CCP as defined in Article 2(1) of EMIR;
  35. ‘participation’ means rights in the capital of other undertakings, whether or not represented by certificates, which, by creating a durable link with those undertakings, are intended to contribute to the activities of the undertaking which holds those rights, or the ownership, direct or indirect, of 20% or more of the voting rights or capital of an undertaking;
  36. qualifying holding means a direct or indirect holding in an undertaking which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking;
  37. control means the relationship between a parent undertaking and a subsidiary, as defined in section 276 of the Companies Act 2014, or a similar relationship between any natural or legal person and an undertaking;
  38. close links means a situation in which two or more natural or legal persons are linked in any of the following ways:

    (a)   participation in the form of ownership, direct or by way of control, of 20 % or more of the voting rights or capital of an undertaking;

    (b)   control;

    (c)   a permanent link of both or all of them to the same third person by a control relationship;

    (38A) ‘common management relationship’ means a relationship between an undertaking (“U1”) and one or more other undertakings (“U2”) which satisfies the following conditions–

         (a)   U1 and U2 are not connected in the manner described in section 276 of the Companies Act 2014; and

         (b)   either–

               (i)    U1 and U2 are managed on a unified basis pursuant to a contract with U1, or provisions in U2's memorandum or articles of association; or

            (ii)   the administrative, management or supervisory bodies of U2 consist, for the major part, of the same persons in office as U1, during the financial year of U1 for which it is being decided whether such a relationship exists;

  39. group of connected clients means any of the following:

    (a)   two or more natural or legal persons who, unless it is shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others;

    (b)   two or more natural or legal persons between whom there is no relationship of control as described in point (a) but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, in particular funding or repayment difficulties, the other or all of the others would also be likely to encounter funding or repayment difficulties.

    Notwithstanding points (a) and (b), where a central government has direct control over or is directly interconnected with more than one natural or legal person, the set consisting of the central government and all of the natural or legal persons directly or indirectly controlled by it in accordance with point (a), or interconnected with it in accordance with point (b), may be considered as not constituting a group of connected clients. Instead the existence of a group of connected clients formed by the central government and other natural or legal persons may be assessed separately for each of the persons directly controlled by it in accordance with point (a), or directly interconnected with it in accordance with point (b), and all of the natural and legal persons which are controlled by that person according to point (a) or interconnected with that person in accordance with point (b), including the central government. The same applies in cases of regional governments or local authorities to which Article 115(2) applies.

    Two or more natural or legal persons who fulfil the conditions set out in point (a) or (b) because of their direct exposure to the same CCP for clearing activities purposes are not considered as constituting a group of connected clients;

  40. ‘competent authority’ means–

    (a)   in Gibraltar, the GFSC; or

    (b)   in a third country, the body which is recognised and empowered by law to supervise institutions as part of the supervisory system in operation in that country;

  41. ‘consolidating supervisor’ means the GFSC when exercising supervision on a consolidated basis, in accordance with the CICR Regulations, of–

    (a)   a Gibraltar parent institution; or

    (b)   an institution controlled by a Gibraltar parent financial holding company or Gibraltar parent mixed financial holding company;

  42. authorisation means an instrument issued in any form by the authorities by which the right to carry out the business is granted;
  43. Omitted
  44. Omitted
  45. Omitted
  46. ‘central banks’ means the Ministry of Finance, the European Central Bank and the central banks of third countries;
  47. consolidated situation means the situation that results from applying the requirements of this Regulation in accordance with Part One, Title II, Chapter 2 to an institution as if that institution formed, together with one or more other entities, a single institution;
  48. consolidated basis means on the basis of the consolidated situation;
  49. sub-consolidated basis means on the basis of the consolidated situation of a parent institution, financial holding company or mixed financial holding company, excluding a sub-group of entities, or on the basis of the consolidated situation of a parent institution, financial holding company or mixed financial holding company that is not the ultimate parent institution, financial holding company or mixed financial holding company;
  50. financial instrument means any of the following:

    (a)   a contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party;

    (b)   an instrument specified in paragraph 46 of Schedule 2 to the Act;

    (c)   a derivative financial instrument;

    (d)   a primary financial instrument;

    (e)   a cash instrument.

    The instruments referred to in points (a), (b) and (c) are only financial instruments if their value is derived from the price of an underlying financial instrument or another underlying item, a rate, or an index;

  51. “initial capital” means the amounts and types of own funds specified in regulation 11(1) of the CICR Regulations;
  52. operational risk means the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, and includes legal risk;
  53. dilution risk means the risk that an amount receivable is reduced through cash or non-cash credits to the obligor;
  54. probability of default or PD means the probability of default of a counterparty over a one-year period;
  55. loss given default or LGD means the ratio of the loss on an exposure due to the default of a counterparty to the amount outstanding at default;
  56. conversion factor means the ratio of the currently undrawn amount of a commitment that could be drawn and that would therefore be outstanding at default to the currently undrawn amount of the commitment, the extent of the commitment being determined by the advised limit, unless the unadvised limit is higher;
  57. credit risk mitigation means a technique used by an institution to reduce the credit risk associated with an exposure or exposures which that institution continues to hold;
  58. funded credit protection means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of an institution derives from the right of that institution, in the event of the default of the counterparty or on the occurrence of other specified credit events relating to the counterparty, to liquidate, or to obtain transfer or appropriation of, or to retain certain assets or amounts, or to reduce the amount of the exposure to, or to replace it with, the amount of the difference between the amount of the exposure and the amount of a claim on the institution;
  59. unfunded credit protection means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of an institution derives from the obligation of a third party to pay an amount in the event of the default of the borrower or the occurrence of other specified credit events;
  60. “cash assimilated instrument” means a certificate of deposit, bond (including a covered bond) or any other non-subordinated instrument, which has been issued by an institution or an investment firm, for which the institution or investment firm has already received full payment and which is to be unconditionally reimbursed by the institution or investment firm at its nominal value;
  61. securitisation means a securitisation as defined in Article 2(1) of the Securitisation Regulation;
  62. securitisation position means a securitisation position as defined in Article 2(19) of the Securitisation Regulation;
  63. resecuritisation means a resecuritisation as defined in Article 2(4) of the Securitisation Regulation;
  64. re-securitisation position means an exposure to a re-securitisation;
  65. credit enhancement means a contractual arrangement whereby the credit quality of a position in a securitisation is improved in relation to what it would have been if the enhancement had not been provided, including the enhancement provided by more junior tranches in the securitisation and other types of credit protection;
  66. securitisation special purpose entity or SSPE means a securitisation special purpose entity or SSPE as defined in Article 2(2) of the Securitisation Regulation;
  67. tranche means a tranche as defined in Article 2(6) of the Securitisation Regulation;
  68. marking to market means the valuation of positions at readily available close out prices that are sourced independently, including exchange prices, screen prices or quotes from several independent reputable brokers;
  69. marking to model means any valuation which has to be benchmarked, extrapolated or otherwise calculated from one or more market inputs;
  70. independent price verification means a process by which market prices or marking to model inputs are regularly verified for accuracy and independence;
  71. eligible capital means the following:

    (a)   for the purposes of Title III of Part Two it means the sum of the following:

         (i)   Tier 1 capital as referred to in Article 25, without applying the deduction in Article 36(1)(k)(i);

        (ii)   Tier 2 capital as referred to in Article 71 that is equal to or less than one third of Tier 1 capital as calculated pursuant to point (i) of this point;

    (b)   for the purposes of Article 97 it means the sum of the following:

         (i)   Tier 1 capital as referred to in Article 25;

        (ii)   Tier 2 capital as referred to in Article 71 that is equal to or less than one third of Tier 1 capital;

  72. recognised exchange means an exchange which meets all of the following conditions:

    (a)   it is a regulated market or a third-country market that is considered to be equivalent to a regulated market in accordance with regulation 40 of the Financial Services (Investment Services) Regulations 2020;

    (b)   it has a clearing mechanism whereby contracts listed in Annex II are subject to daily margin requirements which, in the opinion of the competent authorities, provide appropriate protection;

  73. discretionary pension benefits means enhanced pension benefits granted on a discretionary basis by an institution to an employee as part of that employee's variable remuneration package, which do not include accrued benefits granted to an employee under the terms of the company pension scheme;
  74. mortgage lending value means the value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property;
  75. residential property means a residence which is occupied by the owner or the lessee of the residence;
  76. market value means, for the purposes of immovable property, the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion;
  77. applicable accounting framework means the accounting standards to which the institution is subject under UK-adopted international accounting standards or the Financial Services (Credit Institutions) (Accounts) Regulations 2021;
  78. one-year default rate means the ratio between the number of defaults occurred during a period that starts from one year prior to a date T and the number of obligors assigned to this grade or pool one year prior to that date;
  79. speculative immovable property financing means loans for the purposes of the acquisition of or development or construction on land in relation to immovable property, or of and in relation to such property, with the intention of reselling for profit;
  80. trade finance means financing, including guarantees, connected to the exchange of goods and services through financial products of fixed short-term maturity, generally of less than one year, without automatic rollover;
  81. officially supported export credits means loans or credits to finance the export of goods and services for which an official export credit agency provides guarantees, insurance or direct financing;
  82. repurchase agreement and reverse repurchase agreement mean any agreement in which an institution or its counterparty transfers securities or commodities or guaranteed rights relating to title to securities or commodities where that guarantee is issued by a recognised exchange which holds the rights to the securities or commodities and the agreement does not allow an institution to transfer or pledge a particular security or commodity to more than one counterparty at one time, subject to a commitment to repurchase them, or substituted securities or commodities of the same description at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase agreement for the institution selling the securities or commodities and a reverse repurchase agreement for the institution buying them;
  83. repurchase transaction means any transaction governed by a repurchase agreement or a reverse repurchase agreement;
  84. simple repurchase agreement means a repurchase transaction of a single asset, or of similar, non-complex assets, as opposed to a basket of assets;
  85. positions held with trading intent means any of the following:

    (a)   proprietary positions and positions arising from client servicing and market making;

    (b)   positions intended to be resold short term;

    (c)   positions intended to benefit from actual or expected short-term price differences between buying and selling prices or from other price or interest rate variations;

  86. trading book means all positions in financial instruments and commodities held by an institution either with trading intent or to hedge positions held with trading intent in accordance with Article 104;
  87. multilateral trading facility’ has the meaning given in Article 2.1(14) of MiFIR;
  88. qualifying central counterparty or QCCP means a central counterparty that has been either authorised in accordance with Article 14 of EMIR or recognised in accordance with Article 25 of that Regulation;
  89. default fund means a fund established by a CCP in accordance with Article 42 of EMIR and used in accordance with Article 45 of that Regulation;
  90. pre-funded contribution to the default fund of a CCP means a contribution to the default fund of a CCP that is paid in by an institution;
  91. trade exposure means a current exposure, including a variation margin due to the clearing member but not yet received, and any potential future exposure of a clearing member or a client, to a CCP arising from contracts and transactions listed in points (a), (b) and (c) of Article 301(1), as well as initial margin;
  92. ‘regulated market’ has the meaning given in Article 2.1(13A) of MiFIR;
  93. leverage means the relative size of an institution's assets, off-balance sheet obligations and contingent obligations to pay or to deliver or to provide collateral, including obligations from received funding, made commitments, derivatives or repurchase agreements, but excluding obligations which can only be enforced during the liquidation of an institution, compared to that institution's own funds;
  94. risk of excessive leverage means the risk resulting from an institution's vulnerability due to leverage or contingent leverage that may require unintended corrective measures to its business plan, including distressed selling of assets which might result in losses or in valuation adjustments to its remaining assets;
  95. credit risk adjustment means the amount of specific and general loan loss provision for credit risks that has been recognised in the financial statements of the institution in accordance with the applicable accounting framework;
  96. internal hedge means a position that materially offsets the component risk elements between a trading book position and one or more non-trading book positions or between two trading desks;
  97. reference obligation means an obligation used for the purposes of determining the cash settlement value of a credit derivative;
  98. ‘external credit assessment institution’ or ‘ECAI’ means a credit rating agency that is registered or certified in accordance with the CRA Regulation or a central bank issuing credit ratings which are exempt from the application of that Regulation;
  99. nominated ECAI means an ECAI nominated by an institution;
  100.   accumulated other comprehensive income has the same meaning as under International Accounting Standard (IAS) 1, as applicable under UK-adopted international accounting standards;
  101.  ‘basic own funds’ means basic own funds within the meaning of regulation 82 of the Financial Services (Insurance Companies) Regulations 2020;
  102.  ‘Tier 1 own-fund insurance items’ means basic own-fund items of insurance and reinsurance undertakings where those items are classified in Tier 1 in accordance with regulation 86(1) of the Financial Services (Insurance Companies) Regulations 2020;
  103.  ‘additional Tier 1 own-fund insurance items’ means basic own-fund items of insurance and reinsurance undertakings where those items are classified in Tier 1 in accordance with regulation 86(1) of the Financial Services (Insurance Companies) Regulations 2020 and the inclusion of those items is limited by Article 82.3 of the Solvency 2 Regulation;
  104.  ‘Tier 2 own-fund insurance items’ means basic own-fund items of insurance and reinsurance undertakings where those items are classified in Tier 2 in accordance with regulation 86(2) of the Financial Services (Insurance Companies) Regulations 2020;
  105.  ‘Tier 3 own-fund insurance items’ means basic own-fund insurance items of insurance and reinsurance undertakings where those items are classified in Tier 3 in accordance with regulation 86(3) of the Financial Services (Insurance Companies) Regulations 2020;
  106.   deferred tax assets has the same meaning as under the applicable accounting framework;
  107.   deferred tax assets that rely on future profitability means deferred tax assets the future value of which may be realised only in the event the institution generates taxable profit in the future;
  108.   deferred tax liabilities has the same meaning as under the applicable accounting framework;
  109.   defined benefit pension fund assets means the assets of a defined pension fund or plan, as applicable, calculated after they have been reduced by the amount of obligations under the same fund or plan;
  110.   distributions means the payment of dividends or interest in any form;
  111.  Omitted
  112.  ‘funds for general banking risk’ means those amounts which a credit institution decides to put aside to cover the particular risks associated with banking where this is permitted under the applicable accounting framework;
  113.   goodwill has the same meaning as under the applicable accounting framework;
  114.   indirect holding means any exposure to an intermediate entity that has an exposure to capital instruments issued by a financial sector entity where, in the event the capital instruments issued by the financial sector entity were permanently written off, the loss that the institution would incur as a result would not be materially different from the loss the institution would incur from a direct holding of those capital instruments issued by the financial sector entity;
  115.   intangible assets has the same meaning as under the applicable accounting framework and includes goodwill;
  116.   other capital instruments means capital instruments issued by financial sector entities that do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments or Tier 1 own-fund insurance items, additional Tier 1 own-fund insurance items, Tier 2 own-fund insurance items or Tier 3 own-fund insurance items;
  117.   other reserves means reserves within the meaning of the applicable accounting framework that are required to be disclosed under the applicable accounting standard, excluding any amounts already included in accumulated other comprehensive income or retained earnings;
  118.   own funds means the sum of Tier 1 capital and Tier 2 capital;
  119.   own funds instruments means capital instruments issued by the institution that qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments;
  120.   minority interest means the amount of Common Equity Tier 1 capital of a subsidiary of an institution that is attributable to natural or legal persons other than those included in the prudential scope of consolidation of the institution;
  121.   profit has the same meaning as under the applicable accounting framework;
  122.   reciprocal cross holding means a holding by an institution of the own funds instruments or other capital instruments issued by financial sector entities where those entities also hold own funds instruments issued by the institution;
  123.   retained earnings means profits and losses brought forward as a result of the final application of profit or loss under the applicable accounting framework;
  124.   share premium account has the same meaning as under the applicable accounting framework;
  125.   temporary differences has the same meaning as under the applicable accounting framework;
  126.   synthetic holding means an investment by an institution in a financial instrument the value of which is directly linked to the value of the capital instruments issued by a financial sector entity;
  127.  Omitted

  128.  ‘ distributable items means the amount of the profits at the end of the last financial year plus any profits brought forward and reserves available for that purpose, before distributions to holders of own funds instruments, less any losses brought forward, any profits which are non-distributable under the law of Gibraltar or a third country or the institution's by-laws and any sums placed in non-distributable reserves in accordance with national law or the statutes of the institution, in each case with respect to the specific category of own funds instruments to which the law of Gibraltar or a third country or the institution’s' by-laws or statutes relate; such profits, losses and reserves being determined on the basis of the individual accounts of the institution and not on the basis of the consolidated accounts;

    (128A) ‘CRR covered bonds’ means bonds issued by a credit institution which–

         (a)   has its registered office in Gibraltar; and

         (b)   is subject by law to special public supervision designed to protect bondholders and, in particular, protection under which–

              (i)   sums deriving from the issue of the bond must be invested in conformity with the law in assets;

             (ii)   during the whole period of validity of the bond, those sums are capable of covering claims attaching to the bond; and

            (iii)   in the event of failure of the issuer, those sums would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest; 

  129.  ‘servicer’ means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis;
  130.  ‘resolution authority’ means the Gibraltar Resolution Authority (or, where the context requires, the resolution authority of a third country;
  131.   resolution entity means a resolution entity as defined in regulation 3 of the Recovery and Resolution Regulations;
  132.  ‘ resolution group means a resolution group as defined in regulation 3 of the Recovery and Resolution Regulations;
  133.  ‘ global systemically important institution or G-SII means a G-SII that has been identified in accordance with regulation 85(1) to (7) of the CICR Regulations;
  134.  ‘ third-country global systemically important institution or third-country G-SII means a global systemically important banking group or a bank (G-SIBs) that is not a G-SII and that is included in the list of G-SIBs published by the Financial Stability Board, as regularly updated;
  135.  ‘ material subsidiary means a subsidiary that on an individual or consolidated basis meets any of the following conditions:

    (a)   the subsidiary holds more than 5 % of the consolidated risk-weighted assets of its original parent undertaking;

    (b)   the subsidiary generates more than 5 % of the total operating income of its original parent undertaking;

    (c)   the total exposure measure, referred to in Article 429(4) of this Regulation, of the subsidiary is more than 5 % of the consolidated total exposure measure of its original parent undertaking;

  136.  ‘ G-SII entity means an entity with legal personality that is a G-SII or is part of a G-SII or of a third-country G-SII;
  137.  ‘bail-in tool’ means the mechanism for effecting the exercise by the resolution authority of the write-down and conversion powers in relation to liabilities of an institution under resolution, in accordance with regulation 43 of the Recovery and Resolution Regulations;
  138.  ‘ group means a group of undertakings of which at least one is an institution and which consists of a parent undertaking and its subsidiaries, or of undertakings that are related to each other by a common management relationship;
  139.  ‘ securities financing transaction means a repurchase transaction, a securities or commodities lending or borrowing transaction, or a margin lending transaction;
  140.  ‘ initial margin or IM means any collateral, other than variation margin, collected from or posted to an entity to cover the current and potential future exposure of a transaction or of a portfolio of transactions in the period needed to liquidate those transactions, or to re-hedge their market risk, following the default of the counterparty to the transaction or portfolio of transactions;
  141.  ‘ market risk means the risk of losses arising from movements in market prices, including in foreign exchange rates or commodity prices;
  142.  ‘ foreign exchange risk means the risk of losses arising from movements in foreign exchange rates;
  143.  ‘ commodity risk means the risk of losses arising from movements in commodity prices;
  144.  ‘ trading desk means a well-identified group of dealers set up by the institution to jointly manage a portfolio of trading book positions in accordance with a well-defined and consistent business strategy and operating under the same risk management structure;
  145.  ‘ small and non-complex institution means an institution that meets all the following conditions:

    (a)   it is not a large institution;

    (b)  the total value of its assets on an individual basis or, where applicable, on a consolidated basis in accordance with this Regulation and the CICR Regulations is on average equal to or less than the threshold of €5 billion over the four-year period immediately preceding the current annual reporting period;

    (c)   it is not subject to any obligations, or is subject to simplified obligations, in relation to recovery and resolution planning in accordance with regulation 4 of the Recovery and Resolution Regulations;

    (d)   its trading book business is classified as small within the meaning of Article 94(1);

    (e)   the total value of its derivative positions held with trading intent does not exceed 2 % of its total on- and off-balance-sheet assets and the total value of its overall derivative positions does not exceed 5 %, both calculated in accordance with Article 273a(3);

    (f)   more than 75 % of both the institution's consolidated total assets and liabilities, excluding in both cases the intragroup exposures, relate to activities with counterparties located in Gibraltar;

    (g)   the institution does not use internal models to meet the prudential requirements in accordance with this Regulation except for subsidiaries using internal models developed at the group level, provided that the group is subject to the disclosure requirements laid down in Article 433a or 433c on a consolidated basis;

    (h)   the institution has not communicated to the GFSC an objection to being classified as a small and non-complex institution;

    (i)   the GFSC has not decided that the institution is not to be considered a small and non-complex institution on the basis of an analysis of its size, interconnectedness, complexity or risk profile;

  146.  ‘ large institution means an institution that meets any of the following conditions:

    (a)   it is a G-SII;

    (b)   it has been identified as another systemically important institution (O-SII) in accordance with regulation 85 of the CICR Regulations;

    (c)   the total value of its assets on an individual basis or, where applicable, on the basis of its consolidated situation in accordance with this Regulation and the CICR Regulations is equal to or greater than €30 billion;

  147.  ‘ large subsidiary means a subsidiary that qualifies as a large institution;
  148.  ‘ non-listed institution means an institution that has not issued securities that are admitted to trading on a regulated market;
  149.  ‘ financial report means, for the purposes of Part Eight, a financial report within the meaning of sections 359 and 360 of the Act.
  150.  “commodity and emission allowance dealer” means an undertaking the main business of which consists exclusively of the provision of investment services or activities in relation to–

    (a)   commodity derivatives or commodity derivative contracts in paragraph 46(5), (6), (7), (9) and (10) of Schedule 2 to the Act;

    (b)   derivatives of emission allowances in paragraph 46(4) of that Schedule; or

    (c)   emission allowances in paragraph 46(11) of that Schedule. 

1A.  In this Regulation–

“the Act” means the Financial Services Act 2019;

“CICR Regulations” means the Financial Services (Credit Institutions and Capital Requirements) Regulations 2020;

“CRA Regulation” means Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies;

“EMIR” means Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories;

“GFSC” means the Gibraltar Financial Services Commission within the meaning of section 21(1) of the Act;

“Gibraltar Resolution Authority” means the Gibraltar Resolution Authority within the meaning of section 284 of the Act;

“IFPR Regulations” means the Financial Services (Investment Firms (Prudential Requirements) Regulations 2021;

“Liquidity CDR” means Commission Delegated Regulation (EU) 2015/61, which supplements this Regulation with regard to liquidity coverage requirements;

“MiFIR” means Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012;

“the Minister” means the Minister with responsibility for financial services;

“Part 7 permission” means permission under Part 7 of the Act;

“Recovery and Resolution Regulations” means the Financial Services (Recovery and Resolution) Regulations 2020;

“Securitisation Regulation” has the meaning given in the CICR Regulations;

“technical standards” means technical standards set out in regulations made by the Minister under section 626A of the Act; and

“third country” means a country or territory outside Gibraltar.

“UK-adopted international accounting standards” has the meaning given in section 237 of the Companies Act 2014.

1B.  In these Regulations a reference to an EU Regulation is to that Regulation as it forms part of the law of Gibraltar.

2. Omitted

3. Trade finance as referred to in point (80) of paragraph 1 is generally uncommitted and requires satisfactory supporting transactional documentation for each drawdown request enabling refusal of the finance in the event of any doubt about creditworthiness or the supporting transactional documentation. Repayment of trade finance exposures is usually independent of the borrower, the funds instead coming from cash received from importers or resulting from proceeds of the sales of the underlying goods.

4. The Minister may make technical standards specifying circumstances in which the conditions set out in Article 4.1(39) are met. 

EBA shall submit those draft regulatory technical standards to the Commission by 28 June 2020 .

Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.

 

Article 5 

Definitions specific to capital requirements for credit risk

For the purposes of Part Three, Title II, the following definitions shall apply:

  1. exposure means an asset or off-balance sheet item;
  2. loss means economic loss, including material discount effects, and material direct and indirect costs associated with collecting on the instrument;
  3. expected loss or EL means the ratio of the amount expected to be lost on an exposure from a potential default of a counterparty or dilution over a one-year period to the amount outstanding at default.

 

TITLE II

LEVEL OF APPLICATION OF REQUIREMENTS

CHAPTER 1

Application of requirements on an individual basis

Article 6

General principles

1. Institutions must comply with the obligations in Parts Two, Three, Four, Seven, Seven A and Eight and in Chapter 2 of the Securitisation Regulation on an individual basis, with the exception of Article 430.1(d). 

1a. By way of derogation from paragraph 1 of this Article, only institutions identified as resolution entities that are also G-SIIs or that are part of a G-SII, and that do not have subsidiaries shall comply with the requirement laid down in Article 92a on an individual basis.

Material subsidiaries of a third-country G-SII shall comply with Article 92b on an individual basis, where they meet all the following conditions:

  1. they are not resolution entities;
  2. they do not have subsidiaries;
  3. they are not the subsidiaries of a Gibraltar parent institution. 

2. No institution which is either a subsidiary authorised and supervised in Gibraltar, or a parent undertaking, and no institution included in the consolidation pursuant to Article 18, shall be required to comply with the obligations laid down in Articles 89, 90 and 91 on an individual basis.

3. No institution which is either a parent undertaking or a subsidiary, and no institution included in the consolidation pursuant to Article 18, is required to comply with the obligations laid down in Part Eight on an individual basis.

Despite the first subparagraph of this paragraph, the institutions referred to in paragraph 1a must comply with Articles 437a and 447(h) on an individual basis.

4. Institutions must comply with the obligations in Part Six and Article 430.1(d) on an individual basis. 

The following institutions are not required to comply with Article 413.1 and the associated liquidity reporting requirements in Part Seven A:

  1. institutions which are also authorised in accordance with Article 14 of EMIR;
  2. institutions which are also authorised in accordance with Articles 16 and 54.2(a) of the CSD Regulation and which do not perform any significant maturity transformations; and
  3. institutions which are designated in accordance with Article 54.2(b) of the CSD Regulation:
    1. the activities of which are limited to offering banking-type services of the kind in Section C of the Annex to that Regulation to central securities depositories authorised in accordance with Article 16 of that Regulation; and
    2. which do not perform any significant maturity transformations.

5. Institutions for which the GFSC has exercised the derogation in Article 7.1 or 7.3, and institutions which are also authorised in accordance with Article 14 of EMIR, are not required to comply with the obligations in Part Seven and the associated leverage ratio reporting requirements in Part Seven A on an individual basis.  

 

Article 7

Derogation from the application of prudential requirements on an individual basis

1. The GFSC may waive the application of Article 6(1) to any subsidiary of an institution, where both the subsidiary and the institution are subject to authorisation and supervision in Gibraltar, and the subsidiary is included in the supervision on a consolidated basis of the institution which is the parent undertaking, and all of the following conditions are satisfied, in order to ensure that own funds are distributed adequately between the parent undertaking and the subsidiary:

  1. there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities by its parent undertaking;
  2. either the parent undertaking satisfies the GFSC regarding the prudent management of the subsidiary and has declared, with the permission of the GFSC, that it guarantees the commitments entered into by the subsidiary, or the risks in the subsidiary are of negligible interest;
  3. the risk evaluation, measurement and control procedures of the parent undertaking cover the subsidiary;
  4. the parent undertaking holds more than 50 % of the voting rights attached to shares in the capital of the subsidiary or has the right to appoint or remove a majority of the members of the management body of the subsidiary.

2. The GFSC may exercise the option provided for in paragraph 1 where the parent undertaking of the subsidiary is a Gibraltar financial holding company or a Gibraltar mixed financial holding company, provided that it is subject to the same supervision as that exercised over institutions, and in particular to the standards laid down in Article 11(1).

3. The GFSC may waive the application of Article 6(1) to a Gibraltar parent institution, where it is included in the supervision on a consolidated basis, and all the following conditions are satisfied, in order to ensure that own funds are distributed adequately among the parent undertaking and the subsidiaries:

  1. there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities to the Gibraltar parent institution;
  2. the risk evaluation, measurement and control procedures relevant for consolidated supervision cover the Gibraltar parent institution.

 

Article 8

Derogation from the application of liquidity requirements on an individual basis

1. The GFSC may waive in full or in part the application of Part Six to an institution and to all or some of its subsidiaries in Gibraltar and supervise them as a single liquidity sub-group so long as they fulfil all of the following conditions:

  1. the parent institution on a consolidated basis or a subsidiary institution on a sub-consolidated basis complies with the obligations laid down in Part Six;
  2. the parent institution on a consolidated basis or the subsidiary institution on a sub-consolidated basis:
    1. monitors and has oversight at all times over the liquidity positions of all institutions within the group or sub-group that are subject to the waiver and over the funding positions of all institutions within the group or sub-group where the net stable funding ratio (NSFR) requirement set out in Title IV of Part Six is waived; and
    2. ensures a sufficient level of liquidity, and of stable funding where the NSFR requirement set out in Title IV of Part Six is waived, for all of those institutions;
  3. the institutions have entered into contracts that, to the satisfaction of the GFSC, provide for the free movement of funds between them to enable them to meet their individual and joint obligations as they become due;
  4. there is no current or foreseen material practical or legal impediment to the fulfilment of the contracts referred to in (c).

2. Omitted

3. Omitted

4. Omitted

5. Where a waiver has been granted under paragraph 1, the GFSC may also–

  1. apply all or part of regulation 43 of the CICR Regulations at the level of the single liquidity sub-group; and
  2. waive the application of all or part of regulation 43 of the CICR Regulations on an individual basis.  

6.  Where, in accordance with this Article, the GFSC waives, in part or in full, the application of Part Six to an institution, it may also waive the application of the associated liquidity reporting requirements under Article 430.1(d) for that institution.

 

Article 9 

Individual consolidation method

1. Subject to paragraph 2 of this Article and to regulation 174(3) of the CICR Regulations, the GFSC may permit on a case-by-case basis parent institutions to incorporate in the calculation of their requirement under Article 6(1), subsidiaries which meet the conditions laid down in points (c) and (d) of Article 7(1) and whose material exposures or material liabilities are to that parent institution.

2. The treatment set out in paragraph 1 shall be permitted only where the parent institution demonstrates fully to the GFSC the circumstances and arrangements, including legal arrangements, by virtue of which there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds, or repayment of liabilities when due by the subsidiary to its parent undertaking.

 

Article 10

Omitted

 

Article 10a

Application of prudential requirements on a consolidated basis where investment firms are parent undertakings

 For the purposes of the application of this Chapter, an investment firm must be considered to be a Gibraltar parent financial holding company where it is the parent undertaking of an institution (including of an investment firm to which Article 2.4 applies).

 

CHAPTER 2

Prudential consolidation

Section 1

Application of requirements on a consolidated basis

Article 11

General treatment

1. Gibraltar parent institutions shall comply, to the extent and in the manner set out in Article 18, with the obligations laid down in Parts Two, Three, Four, Seven and Seven A on the basis of their consolidated situation, with the exception of point (d) of Article 430(1). The parent undertakings and their subsidiaries that are subject to this Regulation shall set up a proper organisational structure and appropriate internal control mechanisms in order to ensure that the data required for consolidation are duly processed and forwarded. In particular, they shall ensure that subsidiaries not subject to this Regulation implement arrangements, processes and mechanisms to ensure proper consolidation.

2. For the purpose of ensuring that the requirements of this Regulation are applied on a consolidated basis, the terms institution , Gibraltar parent institution and parent undertaking , as the case may be, shall also refer to:

  1. a financial holding company or mixed financial holding company approved in accordance with regulation 16A of the CICR Regulations;
  2. a designated institution controlled by a parent financial holding company or parent mixed financial holding company where such a parent is not subject to approval in accordance with regulation 16A(5) of the CICR Regulations;
  3. a financial holding company, mixed financial holding company or institution designated in accordance with regulation 16A(12)(d) of the CICR Regulations.

The consolidated situation of an undertaking referred to in point (b) of the first subparagraph of this paragraph shall be the consolidated situation of the parent financial holding company or the parent mixed financial holding company that is not subject to approval in accordance with regulation 16A(5) of the CICR Regulations. The consolidated situation of an undertaking referred to in point (c) of the first subparagraph of this paragraph shall be the consolidated situation of its parent financial holding company or parent mixed financial holding company. 

3.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3a. By way of derogation from paragraph 1 of this Article, only parent institutions identified as resolution entities that are G-SIIs, part of a G-SII or part of a third-country G-SII shall comply with Article 92a of this Regulation on a consolidated basis, to the extent and in the manner set out in Article 18 of this Regulation.

Only Gibraltar parent undertakings that are a material subsidiary of a third-country G-SII and are not resolution entities shall comply with Article 92b of this Regulation on a consolidated basis to the extent and in the manner set out in Article 18 of this Regulation. 

4. Gibraltar parent institutions must comply with Part Six and Article 430.1(d) on the basis of their consolidated situation where the group comprises one or more credit institutions or investment firms that are authorised to provide the investment services and activities listed in paragraphs 50 and 53 of Schedule 2 to the Act. 

Where a waiver has been granted under Article 8.1 to 8.5, the institutions and, where applicable, the financial holding companies or mixed financial holding companies that are part of a liquidity sub-group must comply with Part Six and Article 430.1(d) on a consolidated basis or on the sub-consolidated basis of the liquidity sub-group. 

5. Omitted

6. In addition to the requirements of paragraphs 1 to 3, the GFSC may require an institution to comply with the obligations mentioned in the third sub-paragraph on a sub-consolidated basis where–

(a)   it is justified for supervisory purposes by the specificities of the risk or the capital structure of the institution, or

(b)   the law of Gibraltar requires the structural separation of activities within a banking group.

Applying the approach set out in the first sub-paragraph shall be without prejudice to effective supervision on a consolidated basis.

The obligations mentioned in this paragraph are those provided for in–

(a)   Parts Two to Four and Six to Eight of this Regulation; and

(b)   Chapter 3 of Part 5 of the CICR Regulations. 

 

Article 12 

Financial holding company or mixed financial holding company with both a subsidiary credit institution and a subsidiary investment firm

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

Article 12a 

Consolidated calculation for G-SIIs with multiple resolution entities

Where at least two G-SII entities belonging to the same G-SII are resolution entities, the Gibraltar parent institution of that G-SII shall calculate the amount of own funds and eligible liabilities referred to in point (a) of Article 92a(1) of this Regulation. That calculation shall be undertaken on the basis of the consolidated situation of the Gibraltar parent institution as if it were the only resolution entity of the G-SII.

 

Article 13 

Application of disclosure requirements on a consolidated basis

1. A Gibraltar parent institution shall comply with Part Eight on the basis of its consolidated situation.

2. Large subsidiaries of Gibraltar parent institutions, Gibraltar parent financial holding companies or Gibraltar parent mixed financial holding companies and large subsidiaries of parent undertakings established in a third country shall disclose the information specified in Articles 437, 438, 440, 442, 450, 451a and 453 on an individual basis or, where applicable in accordance with this Regulation and the CICR Regulations, on a sub-consolidated basis. 

3. Paragraph 1 shall not apply to a consolidation entity or a resolution entity where it is included in an equivalent disclosure on a consolidated basis provided by a parent undertaking established in a third country.  

 

Article 14 

Application of requirements of Article 5 of the Securitisation Regulation on a consolidated basis

1. Parent undertakings and their subsidiaries that are subject to this Regulation shall be required to meet the obligations laid down in Article 5 of the Securitisation Regulation on a consolidated or sub-consolidated basis, to ensure that their arrangements, processes and mechanisms required by those provisions are consistent and well-integrated and that any data and information relevant to the purpose of supervision can be produced. In particular, they shall ensure that subsidiaries that are not subject to this Regulation implement arrangements, processes and mechanisms to ensure compliance with those provisions.

2. Institutions shall apply an additional risk weight in accordance with Article 270a of this Regulation when applying Article 92 of this Regulation on a consolidated or sub-consolidated basis if the requirements laid down in Article 5 of the Securitisation Regulation are breached at the level of an entity established in a third country included in the consolidation in accordance with Article 18 of this Regulation if the breach is material in relation to the overall risk profile of the group. 

 

Article 15 

Omitted

 

Article 16 

Omitted

 

Article 17 

Omitted

 

Section 2

Methods for prudential consolidation

Article 18

Methods of prudential consolidation

1. Institutions, financial holding companies and mixed financial holding companies that are required to comply with the requirements referred to in Section 1 of this Chapter on the basis of their consolidated situation shall carry out a full consolidation of all institutions and financial institutions that are their subsidiaries. Paragraphs 3 to 6 and paragraph 9 of this Article shall not apply where Part Six and point (d) of Article 430(1) apply on the basis of the consolidated situation of an institution, financial holding company or mixed financial holding company or on the sub-consolidated situation of a liquidity sub-group as set out in Articles 8 and 10. 

For the purposes of Article 11(3a), institutions that are required to comply with the requirements referred to in Article 92a or 92b on a consolidated basis shall carry out a full consolidation of all institutions and financial institutions that are their subsidiaries in the relevant resolution groups. 

2. Ancillary services undertakings shall be included in consolidation in the cases, and in accordance with the methods, laid down in this Article.

3. Where undertakings are related by a common management relationship, the GFSC shall determine how consolidation is to be carried out.

4. The GFSC as consolidating supervisor shall require the proportional consolidation according to the share of capital held of participations in institutions and financial institutions managed by an undertaking included in the consolidation together with one or more undertakings not included in the consolidation, where the liability of those undertakings is limited to the share of the capital they hold.

5. In the case of participations or capital ties other than those referred to in paragraphs 1 and 4, the GFSC shall determine whether and how consolidation is to be carried out. In particular, it may permit or require the use of the equity method. That method shall not, however, constitute inclusion of the undertakings concerned in supervision on a consolidated basis.

6. The GFSC shall determine whether and how consolidation is to be carried out in the following cases:

  1. where, in the opinion of the GFSC, an institution exercises a significant influence over one or more institutions or financial institutions, but without holding a participation or other capital ties in those institutions; and
  2. where two or more institutions or financial institutions are placed under single management other than pursuant to a contract, clauses of their memoranda or articles of association.

In particular, GFSC may permit or require the use of the method used by undertakings that are linked by a common management relationship. That method shall not, however, constitute inclusion of the undertakings concerned in consolidated supervision.

7. Omitted

By way of derogation from the first subparagraph, competent authorities may allow or require institutions to apply a different method to such subsidiaries or participations, including the method required by the applicable accounting framework, provided that:

  1. the institution does not already apply the equity method on 28 December 2020 ;
  2. it would be unduly burdensome to apply the equity method or the equity method does not adequately reflect the risks that the undertaking referred to in the first subparagraph poses to the institution; and
  3. the method applied does not result in full or proportional consolidation of that undertaking.

8. The GFSC may require full or proportional consolidation of a subsidiary or an undertaking in which an institution holds a participation where that subsidiary or undertaking is not an institution, financial institution or ancillary services undertaking and where all the following conditions are met:

  1. the undertaking is not an insurance undertaking, a third-country insurance undertaking, a reinsurance undertaking, a third-country reinsurance undertaking, an insurance holding company or an undertaking excluded from the scope of the Financial Services (Insurance Companies) Regulations 2020 in accordance with regulation 5 of those Regulations;
  2. there is a substantial risk that the institution decides to provide financial support to that undertaking in stressed conditions, in the absence of, or in excess of any contractual obligations to provide such support. 

9. The Minister may make technical standards specifying conditions in accordance with which consolidation shall be carried out in the cases set out in this Article. 

 

Section 3

Scope of prudential consolidation

Article 19

Entities excluded from the scope of prudential consolidation

1. An institution, a financial institution or an ancillary services undertaking which is a subsidiary or an undertaking in which a participation is held, need not to be included in the consolidation where the total amount of assets and off-balance sheet items of the undertaking concerned is less than the smaller of the following two amounts:

  1. EUR 10 million;
  2. 1 % of the total amount of assets and off-balance sheet items of the parent undertaking or the undertaking that holds the participation.

2. The GFSC as consolidating supervisor may on a case-by-case basis decide in the following cases that an institution, financial institution or ancillary services undertaking which is a subsidiary or in which a participation is held need not be included in the consolidation:

  1. where the undertaking concerned is situated in a third country where there are legal impediments to the transfer of the necessary information;
  2. where the undertaking concerned is of negligible interest only with respect to the objectives of monitoring institutions;
  3. where, in the opinion of the GFSC, the consolidation of the financial situation of the undertaking concerned would be inappropriate or misleading as far as the objectives of the supervision of institutions are concerned. 

3. Where, in the cases referred to in paragraph 1 and point (b) of paragraph 2, several undertakings meet the criteria set out therein, they shall nevertheless be included in the consolidation where collectively they are of non-negligible interest with respect to the specified objectives. 

 

Article 20

Decisions on prudential requirements

Where a Gibraltar parent institution and its subsidiaries, the subsidiaries of a Gibraltar parent financial holding company or a Gibraltar parent mixed financial holding company use an Advanced Measurement Approach referred to in Article 312(2) or an IRB Approach referred to in Article 143 on a unified basis, the GFSC shall allow the qualifying criteria set out in Articles 321 and 322 or in Part Three, Title II, Chapter 3, Section 6 respectively to be met by the parent and its subsidiaries considered together, in a way that is consistent with the structure of the group and its risk management systems, processes and methodologies.

 

Article 21 

Omitted

 

Article 22 

Sub-consolidation in cases of entities in third countries

1.  Subsidiary institutions must apply the requirements in Articles 89, 90 and 91 and Parts Three, Four and Seven and the associated reporting requirements in Part Seven A on the basis of their sub-consolidated situation if those institutions have an institution or a financial institution as a subsidiary in a third country, or hold a participation in such an undertaking.

2. Despite paragraph 1, subsidiary institutions may choose not to apply the requirements in Articles 89, 90 and 91 and Parts Three, Four and Seven and the associated reporting requirements in Part Seven A on the basis of their sub-consolidated situation where the total assets and off-balance-sheet items of their subsidiaries and participations in third countries are less than 10% of the total amount of the assets and off-balance-sheet items of the subsidiary institution.

 

Article 23 

Undertakings in third countries

For the purposes of applying supervision on a consolidated basis in accordance with this Chapter, the terms investment firm , credit institution , financial institution', and institution shall also apply to undertakings established in third countries, which, were they established in Gibraltar, would fulfil the definitions of those terms in Article 4.

 

Article 24

Valuation of assets and off-balance sheet items

1. The valuation of assets and off-balance sheet items shall be effected in accordance with the applicable accounting framework.

2. By way of derogation from paragraph 1, the GFSC may require that institutions effect the valuation of assets and off-balance sheet items and the determination of own funds in accordance with UK-adopted international accounting standards.

 

Article 25

Tier 1 capital

The Tier 1 capital of an institution consists of the sum of the Common Equity Tier 1 capital and Additional Tier 1 capital of the institution.

 

Article 26

Common Equity Tier 1 items

1. Common Equity Tier 1 items of institutions consist of the following:

  1. capital instruments, provided that the conditions laid down in Article 28 or, where applicable, Article 29 are met;
  2. share premium accounts related to the instruments referred to in point (a);
  3. retained earnings;
  4. accumulated other comprehensive income;
  5. other reserves;
  6. funds for general banking risk.

The items referred to in points (c) to (f) shall be recognised as Common Equity Tier 1 only where they are available to the institution for unrestricted and immediate use to cover risks or losses as soon as these occur.

2. For the purposes of point (c) of paragraph 1, institutions may include interim or year-end profits in Common Equity Tier 1 capital before the institution has taken a formal decision confirming the final profit or loss of the institution for the year only with the prior permission of the GFSC. The GFSC shall grant permission where the following conditions are met:

  1. those profits have been verified by persons independent of the institution that are responsible for the auditing of the accounts of that institution;
  2. the institution has demonstrated to the satisfaction of the competent authority that any foreseeable charge or dividend has been deducted from the amount of those profits.

A verification of the interim or year-end profits of the institution shall provide an adequate level of assurance that those profits have been evaluated in accordance with the principles set out in the applicable accounting framework.

3. The GFSC shall evaluate whether issuances of capital instruments meet the criteria set out in Article 28 or, where applicable, Article 29. Institutions shall classify issuances of capital instruments as Common Equity Tier 1 instruments only after permission is granted by the GFSC.

By way of derogation from the first subparagraph, institutions may classify as Common Equity Tier 1 instruments subsequent issuances of a form of Common Equity Tier 1 instruments for which they have already received that permission, provided that both of the following conditions are met: 

  1. the provisions governing those subsequent issuances are substantially the same as the provisions governing those issuances for which the institutions have already received permission;
  2. institutions have notified those subsequent issuances to the competent authorities sufficiently in advance of their classification as Common Equity Tier 1 instruments. 

4. The Minister may make technical standards specifying the meaning of foreseeable when determining whether any foreseeable charge or dividend has been deducted.

 

Article 27

Capital instruments of mutuals, cooperative societies, savings institutions or similar institutions in Common Equity Tier 1 items

1. Common Equity Tier 1 items shall include any capital instrument issued by an institution under its statutory terms provided that the following conditions are met:

  1. the institution is of a type that is defined under the applicable law of Gibraltar and which the GFSC considers to qualify as any of the following:
    1. a mutual;
    2. a cooperative society;
    3. a savings institution;
    4. a similar institution;
    5. a credit institution which is wholly owned by one of the institutions referred to in points (i) to (iv) and has approval from the GFSC to make use of the provisions in this Article, provided that, and for as long as, 100 % of the ordinary shares in issue in the credit institution are held directly or indirectly by an institution referred to in those points;
  2. the conditions laid down in Articles 28 or, where applicable, Article 29, are met.

Those mutuals, cooperative societies or savings institutions recognised as such under the applicable law of Gibraltar prior to 31 December 2012 shall continue to be classified as such for the purposes of this Part, provided that they continue to meet the criteria that determined such recognition.

2. The Minister may make technical standards specifying the types of undertaking that qualify as a mutual, cooperative society, savings institution or similar institution for the purposes of this Part.

 

Article 28

Common Equity Tier 1 instruments

1. Capital instruments shall qualify as Common Equity Tier 1 instruments only if all the following conditions are met:

  1. the instruments are issued directly by the institution with the prior approval of the owners of the institution or, where permitted under the applicable law of Gibraltar or a third country, the management body of the institution;
  2. the instruments are fully paid up and the acquisition of ownership of those instruments is not funded directly or indirectly by the institution; 
  3. the instruments meet all the following conditions as regards their classification:
    1. they qualify as capital, which for these purposes comprises all amounts, regardless of their actual designations, which, in accordance with the legal structure of the institution concerned, are regarded under the applicable law of Gibraltar or a third country, as equity capital subscribed by the shareholders or other proprietors;
    2. they are classified as equity within the meaning of the applicable accounting framework;
    3. they are classified as equity capital for the purposes of determining balance sheet insolvency, where applicable under the insolvency laws of Gibraltar or a third country;
  4. the instruments are clearly and separately disclosed on the balance sheet in the financial statements of the institution;
  5. the instruments are perpetual;
  6. the principal amount of the instruments may not be reduced or repaid, except in either of the following cases:
    1. the liquidation of the institution;
    2. discretionary repurchases of the instruments or other discretionary means of reducing capital, where the institution has received the prior permission of the competent authority in accordance with Article 77;
  7. the provisions governing the instruments do not indicate expressly or implicitly that the principal amount of the instruments would or might be reduced or repaid other than in the liquidation of the institution, and the institution does not otherwise provide such an indication prior to or at issuance of the instruments, except in the case of instruments referred to in Article 27 where the refusal by the institution to redeem such instruments is prohibited under the applicable law of Gibraltar or a third country;
  8. the instruments meet the following conditions as regards distributions:
    1. there is no preferential distribution treatment regarding the order of distribution payments, including in relation to other Common Equity Tier 1 instruments, and the terms governing the instruments do not provide preferential rights to payment of distributions;
    2. distributions to holders of the instruments may be paid only out of distributable items;
    3. the conditions governing the instruments do not include a cap or other restriction on the maximum level of distributions, except in the case of the instruments referred to in Article 27;
    4. the level of distributions is not determined on the basis of the amount for which the instruments were purchased at issuance, except in the case of the instruments referred to in Article 27;
    5. the conditions governing the instruments do not include any obligation for the institution to make distributions to their holders and the institution is not otherwise subject to such an obligation;
    6. non-payment of distributions does not constitute an event of default of the institution;
    7. the cancellation of distributions imposes no restrictions on the institution;
  9. compared to all the capital instruments issued by the institution, the instruments absorb the first and proportionately greatest share of losses as they occur, and each instrument absorbs losses to the same degree as all other Common Equity Tier 1 instruments;
  10. the instruments rank below all other claims in the event of insolvency or liquidation of the institution;
  11. the instruments entitle their owners to a claim on the residual assets of the institution, which, in the event of its liquidation and after the payment of all senior claims, is proportionate to the amount of such instruments issued and is not fixed or subject to a cap, except in the case of the capital instruments referred to in Article 27;
  12. the instruments are neither secured nor subject to a guarantee that enhances the seniority of the claim by any of the following:
    1. the institution or its subsidiaries;
    2. the parent undertaking of the institution or its subsidiaries;
    3. the parent financial holding company or its subsidiaries;
    4. the mixed activity holding company or its subsidiaries;
    5. the mixed financial holding company and its subsidiaries;
    6. any undertaking that has close links with the entities referred to in points (i) to (v);
  13. the instruments are not subject to any arrangement, contractual or otherwise, that enhances the seniority of claims under the instruments in insolvency or liquidation.

The condition set out in point (j) of the first subparagraph shall be deemed to be met, notwithstanding the instruments are included in Additional Tier 1 or Tier 2 by virtue of Article 484(3), provided that they rank pari passu.

For the purposes of point (b) of the first subparagraph, only the part of a capital instrument that is fully paid up shall be eligible to qualify as a Common Equity Tier 1 instrument. 

2. The conditions laid down in point (i) of paragraph 1 shall be deemed to be met notwithstanding a write down on a permanent basis of the principal amount of Additional Tier 1 or Tier 2 instruments.

The condition laid down in point (f) of paragraph 1 shall be deemed to be met notwithstanding the reduction of the principal amount of the capital instrument within a resolution procedure or as a consequence of a write down of capital instruments required by the resolution authority responsible for the institution.

The condition laid down in point (g) of paragraph 1 shall be deemed to be met notwithstanding the provisions governing the capital instrument indicating expressly or implicitly that the principal amount of the instrument would or might be reduced within a resolution procedure or as a consequence of a write down of capital instruments required by the resolution authority responsible for the institution.

3. The condition laid down in point (h)(iii) of paragraph 1 shall be deemed to be met notwithstanding the instrument paying a dividend multiple, provided that such a dividend multiple does not result in a distribution that causes a disproportionate drag on own funds.

The condition set out in point (h)(v) of the first subparagraph of paragraph 1 shall be considered to be met notwithstanding a subsidiary being subject to a profit and loss transfer agreement with its parent undertaking, according to which the subsidiary is obliged to transfer, following the preparation of its annual financial statements, its annual result to the parent undertaking, where all the following conditions are met:

  1. the parent undertaking owns 90 % or more of the voting rights and capital of the subsidiary;
  2. the parent undertaking and the subsidiary are located in Gibraltar;
  3. the agreement was concluded for legitimate taxation purposes;
  4. in preparing the annual financial statement, the subsidiary has discretion to decrease the amount of distributions by allocating a part or all of its profits to its own reserves or funds for general banking risk before making any payment to its parent undertaking;
  5. the parent undertaking is obliged under the agreement to fully compensate the subsidiary for all losses of the subsidiary;
  6. the agreement is subject to a notice period according to which the agreement can be terminated only by the end of an accounting year, with such termination taking effect no earlier than the beginning of the following accounting year, leaving the parent undertaking's obligation to fully compensate the subsidiary for all losses incurred during the current accounting year unchanged.

Where an institution has entered into a profit and loss transfer agreement, it shall notify the competent authority without delay and provide the competent authority with a copy of the agreement. The institution shall also notify the competent authority without delay of any changes to the profit and loss transfer agreement and the termination thereof. An institution shall not enter into more than one profit and loss transfer agreement. 

4. For the purposes of point (h)(i) of paragraph 1, differentiated distributions shall only reflect differentiated voting rights. In this respect, higher distributions shall only apply to Common Equity Tier 1 instruments with fewer or no voting rights.

5. The Minister may make technical standards specifying:

  1. the applicable forms and nature of indirect funding of own funds instruments;
  2. whether and when multiple distributions would constitute a disproportionate drag on own funds;
  3. the meaning of preferential distributions.

 

Article 29

Capital instruments issued by mutuals, cooperative societies, savings institutions and similar institutions

1. Capital instruments issued by mutuals, cooperative societies, savings institutions and similar institutions shall qualify as Common Equity Tier 1 instruments only if the conditions laid down in Article 28 with modifications resulting from the application of this Article are met.

2. The following conditions shall be met as regards redemption of the capital instruments:

  1. except where prohibited under the applicable law of Gibraltar or a third country, the institution shall be able to refuse the redemption of the instruments;
  2. where the refusal by the institution of the redemption of instruments is prohibited under the applicable law of Gibraltar or a third country, the provisions governing the instruments shall give the institution the ability to limit their redemption;
  3. refusal to redeem the instruments, or the limitation of the redemption of the instruments where applicable, may not constitute an event of default of the institution.

3. The capital instruments may include a cap or restriction on the maximum level of distributions only where that cap or restriction is set out under the applicable law of Gibraltar or a third country or the statute of the institution.

4. Where the capital instruments provide the owner with rights to the reserves of the institution in the event of insolvency or liquidation that are limited to the nominal value of the instruments, such a limitation shall apply to the same degree to the holders of all other Common Equity Tier 1 instruments issued by that institution.

The condition laid down in the first subparagraph is without prejudice to the possibility for a mutual, cooperative society, savings institution or a similar institution to recognise within Common Equity Tier 1 instruments that do not afford voting rights to the holder and that meet all the following conditions:

  1. the claim of the holders of the non-voting instruments in the insolvency or liquidation of the institution is proportionate to the share of the total Common Equity Tier 1 instruments that those non-voting instruments represent;
  2. the instruments otherwise qualify as Common Equity Tier 1 instruments.

5. Where the capital instruments entitle their owners to a claim on the assets of the institution in the event of its insolvency or liquidation that is fixed or subject to a cap, such a limitation shall apply to the same degree to all holders of all Common Equity Tier 1 instruments issued by the institution.

6. The Minister may make technical standards specifying the nature of the limitations on redemption necessary where the refusal by the institution of the redemption of own funds instruments is prohibited under the applicable law of a third country.

 

Article 30 

Consequences of the conditions for Common Equity Tier 1 instruments ceasing to be met

The following shall apply where, in the case of a Common Equity Tier 1 instrument, the conditions laid down in Article 28 or, where applicable, Article 29 cease to be met:

  1. that instrument shall immediately cease to qualify as a Common Equity Tier 1 instrument;
  2. the share premium accounts that relate to that instrument shall immediately cease to qualify as Common Equity Tier 1 items.

 

Article 31

Capital instruments subscribed by public authorities in emergency situations

1. In emergency situations, the GFSC may permit institutions to include in Common Equity Tier 1 capital instruments that comply at least with the conditions laid down in points (b) to (e) of Article 28(1) where all the following conditions are met:

  1. the capital instruments are issued after 1 January 2014 ;
  2. the capital instruments amount to financial support provided by the state;
  3. the capital instruments are issued within the context of recapitalisation measures amounting to financial support provided by the state in Gibraltar, or pursuant to state aid rules in a third country, at the time;
  4. the capital instruments are fully subscribed and held by the State or a relevant public authority or public-owned entity;
  5. the capital instruments are able to absorb losses;
  6. except for the capital instruments referred to in Article 27, in the event of liquidation, the capital instruments entitle their owners to a claim on the residual assets of the institution after the payment of all senior claims;
  7. there are adequate exit mechanisms of the State or, where applicable, a relevant public authority or public-owned entity;
  8. the GFSC has granted its prior permission and has published its decision together with an explanation of that decision.

2. Omitted 

 

Article 32

Securitised assets

1. An institution shall exclude from any element of own funds any increase in its equity under the applicable accounting framework that results from securitised assets, including the following:

  1. such an increase associated with future margin income that results in a gain on sale for the institution;
  2. where the institution is the originator of a securitisation, net gains that arise from the capitalisation of future income from the securitised assets that provide credit enhancement to positions in the securitisation.

2. The Minister may make technical standards further specifying the concept of a gain on sale referred to in point (a) of paragraph 1.

 

Article 33

Cash flow hedges and changes in the value of own liabilities

1. Institutions shall not include the following items in any element of own funds:

  1. the fair value reserves related to gains or losses on cash flow hedges of financial instruments that are not valued at fair value, including projected cash flows;
  2. gains or losses on liabilities of the institution that are valued at fair value that result from changes in the own credit standing of the institution;
  3.  fair value gains and losses on derivative liabilities of the institution that result from changes in the own credit risk of the institution. 

2. For the purposes of point (c) of paragraph 1, institutions shall not offset the fair value gains and losses arising from the institution's own credit risk with those arising from its counterparty credit risk.

3. Without prejudice to point (b) of paragraph 1, institutions may include the amount of gains and losses on their liabilities in own funds where all the following conditions are met:

  1. the liabilities are CRR covered bonds;
  2. the changes in the value of the institution's assets and liabilities are due to the same changes in the institution's own credit standing;
  3. there is a close correspondence between the value of the bonds referred to in point (a) and the value of the institution's assets;
  4. it is possible to redeem the mortgage loans by buying back the bonds financing the mortgage loans at market or nominal value.

4. The Minister may make technical standards specifying what constitutes close correspondence between the value of the bonds and the value of the assets, as referred to in point (c) of paragraph 3.

 

Article 34

Additional value adjustments 

Institutions shall apply the requirements of Article 105 to all their assets measured at fair value when calculating the amount of their own funds and shall deduct from Common Equity Tier 1 capital the amount of any additional value adjustments necessary.

 

Article 35

Unrealised gains and losses measured at fair value

Except in the case of the items referred to in Article 33, institutions shall not make adjustments to remove from their own funds unrealised gains or losses on their assets or liabilities measured at fair value.

 

Article 36

Deductions from Common Equity Tier 1 items

1. Institutions shall deduct the following from Common Equity Tier 1 items:

  1. losses for the current financial year;
  2. intangible assets with the exception of prudently valued software assets the value of which is not negatively affected by resolution, insolvency or liquidation of the institution;
  3. deferred tax assets that rely on future profitability;
  4. for institutions calculating risk-weighted exposure amounts using the Internal Ratings Based Approach (the IRB Approach), negative amounts resulting from the calculation of expected loss amounts laid down in Articles 158 and 159;
  5. defined benefit pension fund assets on the balance sheet of the institution;
  6. direct, indirect and synthetic holdings by an institution of own Common Equity Tier 1 instruments, including own Common Equity Tier 1 instruments that an institution is under an actual or contingent obligation to purchase by virtue of an existing contractual obligation;
  7. direct, indirect and synthetic holdings of the Common Equity Tier 1 instruments of financial sector entities where those entities have a reciprocal cross holding with the institution that the competent authority considers to have been designed to inflate artificially the own funds of the institution;
  8. the applicable amount of direct, indirect and synthetic holdings by the institution of Common Equity Tier 1 instruments of financial sector entities where the institution does not have a significant investment in those entities;
  9. the applicable amount of direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1 instruments of financial sector entities where the institution has a significant investment in those entities;
  10. the amount of items required to be deducted from Additional Tier 1 items pursuant to Article 56 that exceeds the Additional Tier 1 items of the institution; 
  11. the exposure amount of the following items which qualify for a risk weight of 1 250  %, where the institution deducts that exposure amount from the amount of Common Equity Tier 1 items as an alternative to applying a risk weight of 1 250  %:
    1. qualifying holdings outside the financial sector;
    2. securitisation positions, in accordance with point (b) of Article 244(1), point (b) of Article 245(1) and Article 253;
    3. free deliveries, in accordance with Article 379(3);
    4. positions in a basket for which an institution cannot determine the risk weight under the IRB Approach, in accordance with Article 153(8);
    5. equity exposures under an internal models approach, in accordance with Article 155(4).
  12. any tax charge relating to Common Equity Tier 1 items foreseeable at the moment of its calculation, except where the institution suitably adjusts the amount of Common Equity Tier 1 items insofar as such tax charges reduce the amount up to which those items may be used to cover risks or losses;
  13. the applicable amount of insufficient coverage for non-performing exposures.

2. The Minister may make technical standards specifying: 

  1. the application of the deductions referred to in paragraph 1(a), (c), (e), (f), (h), (i) and (l) and related deductions referred to in Article 56(a), (c), (d) and (f) and Article 66 points (a), (c) and (d); 
  2. the types of capital instruments of financial institutions, third country insurance and reinsurance undertakings, and undertakings within Article 4(1)(27)(k) that shall be deducted from the following elements of own funds:
    1. Common Equity Tier 1 items;
    2. Additional Tier 1 items;
    3. Tier 2 items;
  3. the application of the deductions referred to in paragraph 1 point (b), including the materiality of negative effects on the value which do not cause prudential concerns. 
 

Article 37 

Deduction of intangible assets

Institutions shall determine the amount of intangible assets to be deducted in accordance with the following:

  1. the amount to be deducted shall be reduced by the amount of associated deferred tax liabilities that would be extinguished if the intangible assets became impaired or were derecognised under the applicable accounting framework;
  2. the amount to be deducted shall include goodwill included in the valuation of significant investments of the institution;
  3. the amount to be deducted shall be reduced by the amount of the accounting revaluation of the subsidiaries' intangible assets derived from the consolidation of subsidiaries attributable to persons other than the undertakings included in the consolidation pursuant to Chapter 2 of Title II of Part One.

 

Article 38

Deduction of deferred tax assets that rely on future profitability

1. Institutions shall determine the amount of deferred tax assets that rely on future profitability that require deduction in accordance with this Article.

2. Except where the conditions laid down in paragraph 3 are met, the amount of deferred tax assets that rely on future profitability shall be calculated without reducing it by the amount of the associated deferred tax liabilities of the institution.

3. The amount of deferred tax assets that rely on future profitability may be reduced by the amount of the associated deferred tax liabilities of the institution, provided the following conditions are met:

  1. the entity has a legally enforceable right under the applicable law of Gibraltar or a third country to set off those current tax assets against current tax liabilities;
  2. the deferred tax assets and the deferred tax liabilities relate to taxes levied by the same tax authority and on the same taxable entity.

4. Associated deferred tax liabilities of the institution used for the purposes of paragraph 3 may not include deferred tax liabilities that reduce the amount of intangible assets or defined benefit pension fund assets required to be deducted.

5. The amount of associated deferred tax liabilities referred to in paragraph 4 shall be allocated between the following:

  1. deferred tax assets that rely on future profitability and arise from temporary differences that are not deducted in accordance with Article 48(1);
  2. all other deferred tax assets that rely on future profitability.

Institutions shall allocate the associated deferred tax liabilities according to the proportion of deferred tax assets that rely on future profitability that the items referred to in points (a) and (b) represent.

 

Article 39

Tax overpayments, tax loss carry backs and deferred tax assets that do not rely on future profitability

1. The following items shall not be deducted from own funds and shall be subject to a risk weight in accordance with Chapter 2 or 3 of Title II of Part Three, as applicable:

  1. overpayments of tax by the institution for the current year;
  2. current year tax losses of the institution carried back to previous years that give rise to a claim on, or a receivable from, a central government, regional government or local tax authority.

2. Deferred tax assets that do not rely on future profitability shall be limited to deferred tax assets which were created before  23 November 2016 and which arise from temporary differences, where all the following conditions are met:

  1. they are automatically and mandatorily replaced without delay with a tax credit in the event that the institution reports a loss when the annual financial statements of the institution are formally approved, or in the event of liquidation or insolvency of the institution;
  2. an institution is able under the applicable tax law of Gibraltar or a third country to offset a tax credit referred to in point (a) against any tax liability of the institution or any other undertaking included in the same consolidation as the institution for tax purposes under that law or any other undertaking subject to the supervision on a consolidated basis in accordance with Chapter 2 of Title II of Part One;
  3. where the amount of tax credits referred to in point (b) exceeds the tax liabilities referred to in that point, any such excess is replaced without delay with a direct claim on the government of Gibraltar.

Institutions shall apply a risk weight of 100 % to deferred tax assets where the conditions laid down in points (a), (b) and (c) are met.

 

Article 40

Deduction of negative amounts resulting from the calculation of expected loss amounts

The amount to be deducted in accordance with point (d) of Article 36(1) shall not be reduced by a rise in the level of deferred tax assets that rely on future profitability, or other additional tax effects, that could occur if provisions were to rise to the level of expected losses referred to in Section 3 of Chapter 3 of Title II of Part Three.

 

Article 41

Deduction of defined benefit pension fund assets

1. For the purposes of point (e) of Article 36(1), the amount of defined benefit pension fund assets to be deducted shall be reduced by the following:

  1. the amount of any associated deferred tax liability which could be extinguished if the assets became impaired or were derecognised under the applicable accounting framework;
  2. the amount of assets in the defined benefit pension fund which the institution has an unrestricted ability to use, provided that the institution has received the prior permission of the competent authority.

Those assets used to reduce the amount to be deducted shall receive a risk weight in accordance with Chapter 2 or 3 of Title II of Part Three, as applicable.

2. The Minister may make technical standards specifying the criteria according to which the GFSC may permit an institution to reduce the amount of assets in the defined benefit pension fund as specified in paragraph 1(b). 

 

Article 42

Deduction of holdings of own Common Equity Tier 1 instruments

For the purposes of point (f) of Article 36(1), institutions shall calculate holdings of own Common Equity Tier 1 instruments on the basis of gross long positions subject to the following exceptions:

  1. institutions may calculate the amount of holdings of own Common Equity Tier 1 instruments on the basis of the net long position provided that both the following conditions are met:
    1. the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book;
    3. institutions shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating the underlying exposure to own Common Equity Tier 1 instruments included in those indices;
  2. institutions may net gross long positions in own Common Equity Tier 1 instruments resulting from holdings of index securities against short positions in own Common Equity Tier 1 instruments resulting from short positions in the underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
    1. the long and short positions are in the same underlying indices;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book.

 

Article 43 

Significant investment in a financial sector entity

For the purposes of deduction, a significant investment of an institution in a financial sector entity shall arise where any of the following conditions is met:

  1. the institution owns more than 10 % of the Common Equity Tier 1 instruments issued by that entity;
  2. the institution has close links with that entity and owns Common Equity Tier 1 instruments issued by that entity;
  3. the institution owns Common Equity Tier 1 instruments issued by that entity and the entity is not included in consolidation pursuant to Chapter 2 of Title II of Part One but is included in the same accounting consolidation as the institution for the purposes of financial reporting under the applicable accounting framework.

 

Article 44

Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities and where an institution has a reciprocal cross holding designed artificially to inflate own funds

Institutions shall make the deductions referred to in points (g), (h) and (i) of Article 36(1) in accordance with the following:

  1. holdings of Common Equity Tier 1 instruments and other capital instruments of financial sector entities shall be calculated on the basis of the gross long positions;
  2. Tier 1 own-fund insurance items shall be treated as holdings of Common Equity Tier 1 instruments for the purposes of deduction.

 

Article 45

Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities

Institutions shall make the deductions required by points (h) and (i) of Article 36(1) in accordance with the following provisions:

  1. they may calculate direct, indirect and synthetic holdings of Common Equity Tier 1 instruments of the financial sector entities on the basis of the net long position in the same underlying exposure provided that both the following conditions are met:
    1. the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year;
    2. either both the long position and the short position are held in the trading book or both are held in the non-trading book;
  2. they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating the underlying exposure to the capital instruments of the financial sector entities in those indices.

 

Article 46

Deduction of holdings of Common Equity Tier 1 instruments where an institution does not have a significant investment in a financial sector entity

1. For the purposes of point (h) of Article 36(1), institutions shall calculate the applicable amount to be deducted by multiplying the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b) of this paragraph:

  1. the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities in which the institution does not have a significant investment exceeds 10 % of the aggregate amount of Common Equity Tier 1 items of the institution calculated after applying the following to Common Equity Tier 1 items:
    1. Articles 32 to 35;
    2. the deductions referred to in points (a) to (g), points (k)(ii) to (v) and point (l) of Article 36(1), excluding the amount to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences;
    3. Articles 44 and 45;
  2. the amount of direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1 instruments of those financial sector entities in which the institution does not have a significant investment divided by the aggregate amount of direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of those financial sector entities.

2. Institutions shall exclude underwriting positions held for five working days or fewer from the amount referred to in point (a) of paragraph 1 and from the calculation of the factor referred to in point (b) of paragraph 1.

3. The amount to be deducted pursuant to paragraph 1 shall be apportioned across all Common Equity Tier 1 instruments held. Institutions shall determine the amount of each Common Equity Tier 1 instrument that is deducted pursuant to paragraph 1 by multiplying the amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:

  1. the amount of holdings required to be deducted pursuant to paragraph 1;
  2. the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1 instruments of financial sector entities in which the institution does not have a significant investment represented by each Common Equity Tier 1 instrument held.

4. The amount of holdings referred to in point (h) of Article 36(1) that is equal to or less than 10 % of the Common Equity Tier 1 items of the institution after applying the provisions laid down in points (a)(i) to (iii) of paragraph 1 shall not be deducted and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three and the requirements laid down in Title IV of Part Three, as applicable.

5. Institutions shall determine the amount of each Common Equity Tier 1 instrument that is risk weighted pursuant to paragraph 4 by multiplying the amount specified in point (a) of this paragraph by the amount specified in point (b) of this paragraph:

  1. the amount of holdings required to be risk weighted pursuant to paragraph 4;
  2. the proportion resulting from the calculation in point (b) of paragraph 3.

 

Article 47

Deduction of holdings of Common Equity Tier 1 instruments where an institution has a significant investment in a financial sector entity

For the purposes of point (i) of Article 36(1), the applicable amount to be deducted from Common Equity Tier 1 items shall exclude underwriting positions held for five working days or fewer and shall be determined in accordance with Articles 44 and 45 and Sub-section 2.

 

Article 47a

Non-performing exposures

1. For the purposes of point (m) of Article 36(1), exposure shall include any of the following items, provided they are not included in the trading book of the institution:

  1. a debt instrument, including a debt security, a loan, an advance and a demand deposit;
  2. a loan commitment given, a financial guarantee given or any other commitment given, irrespective of whether it is revocable or irrevocable, with the exception of undrawn credit facilities that may be cancelled unconditionally at any time and without notice, or that effectively provide for automatic cancellation due to deterioration in the borrower's creditworthiness.

2. For the purposes of point (m) of Article 36(1), the exposure value of a debt instrument shall be its accounting value measured without taking into account any specific credit risk adjustments, additional value adjustments in accordance with Articles 34 and 105, amounts deducted in accordance with point (m) of Article 36(1), other own funds reductions related to the exposure or partial write-offs made by the institution since the last time the exposure was classified as non-performing.

For the purposes of point (m) of Article 36(1), the exposure value of a debt instrument that was purchased at a price lower than the amount owed by the debtor shall include the difference between the purchase price and the amount owed by the debtor.

For the purposes of point (m) of Article 36(1), the exposure value of a loan commitment given, a financial guarantee given or any other commitment given as referred to in point (b) of paragraph 1 of this Article shall be its nominal value, which shall represent the institution's maximum exposure to credit risk without taking account of any funded or unfunded credit protection. The nominal value of a loan commitment given shall be the undrawn amount that the institution has committed to lend and the nominal value of a financial guarantee given shall be the maximum amount the entity could have to pay if the guarantee is called on.

The nominal value referred to in the third subparagraph of this paragraph shall not take into account any specific credit risk adjustment, additional value adjustments in accordance with Articles 34 and 105, amounts deducted in accordance with point (m) of Article 36(1) or other own funds reductions related to the exposure.

3. For the purposes of point (m) of Article 36(1), the following exposures shall be classified as non-performing:

  1. an exposure in respect of which a default is considered to have occurred in accordance with Article 178;
  2. an exposure which is considered to be impaired in accordance with the applicable accounting framework;
  3. an exposure under probation pursuant to paragraph 7, where additional forbearance measures are granted or where the exposure becomes more than 30 days past due;
  4. an exposure in the form of a commitment that, were it drawn down or otherwise used, would likely not be paid back in full without realisation of collateral;
  5. an exposure in form of a financial guarantee that is likely to be called by the guaranteed party, including where the underlying guaranteed exposure meets the criteria to be considered as non-performing.

For the purposes of point (a), where an institution has on-balance-sheet exposures to an obligor that are past due by more than 90 days and that represent more than 20 % of all on-balance-sheet exposures to that obligor, all on- and off-balance-sheet exposures to that obligor shall be considered to be non-performing.

4. Exposures that have not been subject to a forbearance measure shall cease to be classified as non-performing for the purposes of point (m) of Article 36(1) where all the following conditions are met:

  1. the exposure meets the exit criteria applied by the institution for the discontinuation of the classification as impaired in accordance with the applicable accounting framework and of the classification as defaulted in accordance with Article 178;
  2. the situation of the obligor has improved to the extent that the institution is satisfied that full and timely repayment is likely to be made;
  3. the obligor does not have any amount past due by more than 90 days.

5. The classification of a non-performing exposure as non-current asset held for sale in accordance with the applicable accounting framework shall not discontinue its classification as non-performing exposure for the purposes of point (m) of Article 36(1).

6. Non-performing exposures subject to forbearance measures shall cease to be classified as non-performing for the purposes of point (m) of Article 36(1) where all the following conditions are met:

  1. the exposures have ceased to be in a situation that would lead to their classification as non-performing under paragraph 3;
  2. at least one year has passed since the date on which the forbearance measures were granted and the date on which the exposures were classified as non-performing, whichever is later;
  3. there is no past-due amount following the forbearance measures and the institution, on the basis of the analysis of the obligor's financial situation, is satisfied about the likelihood of the full and timely repayment of the exposure.

Full and timely repayment may be considered likely where the obligor has executed regular and timely payments of amounts equal to either of the following:

  1. the amount that was past due before the forbearance measure was granted, where there were amounts past due;
  2. the amount that has been written-off under the forbearance measures granted, where there were no amounts past due.

7. Where a non-performing exposure has ceased to be classified as non-performing pursuant to paragraph 6, such exposure shall be under probation until all the following conditions are met:

  1. at least two years have passed since the date on which the exposure subject to forbearance measures was re-classified as performing;
  2. regular and timely payments have been made during at least half of the period that the exposure would be under probation, leading to the payment of a substantial aggregate amount of principal or interest;
  3. none of the exposures to the obligor is more than 30 days past due. 

 

Article 47b

Forbearance measures

1. Forbearance measure is a concession by an institution towards an obligor that is experiencing or is likely to experience difficulties in meeting its financial commitments. A concession may entail a loss for the lender and shall refer to either of the following actions:

  1. a modification of the terms and conditions of a debt obligation, where such modification would not have been granted had the obligor not experienced difficulties in meeting its financial commitments;
  2. a total or partial refinancing of a debt obligation, where such refinancing would not have been granted had the obligor not experienced difficulties in meeting its financial commitments.

2. At least the following situations shall be considered forbearance measures:

  1. new contract terms are more favourable to the obligor than the previous contract terms, where the obligor is experiencing or is likely to experience difficulties in meeting its financial commitments;
  2. new contract terms are more favourable to the obligor than contract terms offered by the same institution to obligors with a similar risk profile at that time, where the obligor is experiencing or is likely to experience difficulties in meeting its financial commitments;
  3. the exposure under the initial contract terms was classified as non-performing before the modification to the contract terms or would have been classified as non-performing in the absence of modification to the contract terms;
  4. the measure results in a total or partial cancellation of the debt obligation;
  5. the institution approves the exercise of clauses that enable the obligor to modify the terms of the contract and the exposure was classified as non-performing before the exercise of those clauses, or would be classified as non-performing were those clauses not exercised;
  6. at or close to the time of the granting of debt, the obligor made payments of principal or interest on another debt obligation with the same institution, which was classified as a non-performing exposure or would have been classified as non-performing in the absence of those payments;
  7. the modification to the contract terms involves repayments made by taking possession of collateral, where such modification constitutes a concession.

3. The following circumstances are indicators that forbearance measures may have been adopted:

  1. the initial contract was past due by more than 30 days at least once during the three months prior to its modification or would be more than 30 days past due without modification;
  2. at or close to the time of concluding the credit agreement, the obligor made payments of principal or interest on another debt obligation with the same institution that was past due by 30 days at least once during the three months prior to the granting of new debt;
  3. the institution approves the exercise of clauses that enable the obligor to change the terms of the contract, and the exposure is 30 days past due or would be 30 days past due were those clauses not exercised.

4. For the purposes of this Article, the difficulties experienced by an obligor in meeting its financial commitments shall be assessed at obligor level, taking into account all the legal entities in the obligor's group which are included in the accounting consolidation of the group, and natural persons who control that group. 

 

Article 47c

Deduction for non-performing exposures

1. For the purposes of point (m) of Article 36(1), institutions shall determine the applicable amount of insufficient coverage separately for each non-performing exposure to be deducted from Common Equity Tier 1 items by subtracting the amount determined in point (b) of this paragraph from the amount determined in point (a) of this paragraph, where the amount referred to in point (a) exceeds the amount referred to in point (b):

  1. the sum of:
    1. he unsecured part of each non-performing exposure, if any, multiplied by the applicable factor referred to in paragraph 2;
    2. he secured part of each non-performing exposure, if any, multiplied by the applicable factor referred to in paragraph 3;
  2. the sum of the following items provided they relate to the same non-performing exposure:
    1. specific credit risk adjustments;
    2. additional value adjustments in accordance with Articles 34 and 105;
    3. other own funds reductions;
    4. for institutions calculating risk-weighted exposure amounts using the Internal Ratings Based Approach, the absolute value of the amounts deducted pursuant to point (d) of Article 36(1) which relate to non-performing exposures, where the absolute value attributable to each non-performing exposure is determined by multiplying the amounts deducted pursuant to point (d) of Article 36(1) by the contribution of the expected loss amount for the non-performing exposure to total expected loss amounts for defaulted or non-defaulted exposures, as applicable;
    5. where a non-performing exposure is purchased at a price lower than the amount owed by the debtor, the difference between the purchase price and the amount owed by the debtor;
    6. amounts written-off by the institution since the exposure was classified as non-performing.

The secured part of a non-performing exposure is that part of the exposure which, for the purpose of calculating own funds requirements pursuant to Title II of Part Three, is considered to be covered by a funded credit protection or unfunded credit protection or fully and completely secured by mortgages.

The unsecured part of a non-performing exposure corresponds to the difference, if any, between the value of the exposure as referred to in Article 47a(1) and the secured part of the exposure, if any.

2. For the purposes of point (a)(i) of paragraph 1, the following factors shall apply:

  1. 0,35 for the unsecured part of a non-performing exposure to be applied during the period between the first and the last day of the third year following its classification as non-performing;
  2. 1 for the unsecured part of a non-performing exposure to be applied as of the first day of the fourth year following its classification as non-performing.

3. For the purposes of point (a)(ii) of paragraph 1, the following factors shall apply:

  1. 0,25 for the secured part of a non-performing exposure to be applied during the period between the first and the last day of the fourth year following its classification as non-performing;
  2. 0,35 for the secured part of a non-performing exposure to be applied during the period between the first and the last day of the fifth year following its classification as non-performing;
  3. 0,55 for the secured part of a non-performing exposure to be applied during the period between the first and the last day of the sixth year following its classification as non-performing;
  4. 0,70 for the part of a non-performing exposure secured by immovable property pursuant to Title II of Part Three or that is a residential loan guaranteed by an eligible protection provider as referred to in Article 201, to be applied during the period between the first and the last day of the seventh year following its classification as non-performing;
  5. 0,80 for the part of a non-performing exposure secured by other funded or unfunded credit protection pursuant to Title II of Part Three to be applied during the period between the first and the last day of the seventh year following its classification as non-performing;
  6. 0,80 for the part of a non-performing exposure secured by immovable property pursuant to Title II of Part Three or that is a residential loan guaranteed by an eligible protection provider as referred to in Article 201, to be applied during the period between the first and the last day of the eighth year following its classification as non-performing;
  7. 1 for the part of a non-performing exposure secured by other funded or unfunded credit protection pursuant to Title II of Part Three to be applied as of the first day of the eighth year following its classification as non-performing;
  8. 0,85 for the part of a non-performing exposure secured by immovable property pursuant to Title II of Part Three or that is a residential loan guaranteed by an eligible protection provider as referred to in Article 201, to be applied during the period between the first and the last day of the ninth year following its classification as non-performing;
  9. 1 for the part of a non-performing exposure secured by immovable property pursuant to Title II of Part Three or that is a residential loan guaranteed by an eligible protection provider as referred to in Article 201, to be applied as of the first day of the tenth year following its classification as non-performing.

4. By way of derogation from paragraph 3 of this Article, the following factors shall apply to the part of the non-performing exposure guaranteed or insured by an official export credit agency or guaranteed or counter-guaranteed by an eligible protection provider referred to in points (a) to (e) of Article 201(1), unsecured exposures to which would be assigned a risk weight of 0 % under Chapter 2 of Title II of Part Three: 

  1. 0 for the secured part of the non-performing exposure to be applied during the period between one year and seven years following its classification as non-performing; and
  2. 1 for the secured part of the non-performing exposure to be applied as of the first day of the eighth year following its classification as non-performing.

5. The Minister may make technical standards specifying a common methodology for:

  1. the prudential valuation of eligible forms of funded and unfunded credit protection, including:
    1. possible minimum requirements for re-valuation in terms of timing and ad hoc methods; and
    2. assumptions pertaining to their recoverability and enforceability; and
  2. the determination of the secured part of a non-performing exposure, as referred to in paragraph 1. 

6. By way of derogation from paragraph 2, where an exposure has, between one year and two years following its classification as non-performing, been granted a forbearance measure, the factor applicable in accordance with paragraph 2 on the date on which the forbearance measure is granted shall be applicable for an additional period of one year.

By way of derogation from paragraph 3, where an exposure has, between two and six years following its classification as non-performing, been granted a forbearance measure, the factor applicable in accordance with paragraph 3 on the date on which the forbearance measure is granted shall be applicable for an additional period of one year.

This paragraph shall only apply in relation to the first forbearance measure that has been granted since the classification of the exposure as non-performing.

 

Article 48

Threshold exemptions from deduction from Common Equity Tier 1 items

1. In making the deductions required pursuant to points (c) and (i) of Article 36(1), institutions are not required to deduct the amounts of the items listed in points (a) and (b) of this paragraph which in aggregate are equal to or less than the threshold amount referred to in paragraph 2:

  1. deferred tax assets that are dependent on future profitability and arise from temporary differences, and in aggregate are equal to or less than 10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:
    1. Articles 32 to 35;
    2. points (a) to (h), points (k)(ii) to (v) and point (l) of Article 36(1), excluding deferred tax assets that rely on future profitability and arise from temporary differences.
  2. where an institution has a significant investment in a financial sector entity, the direct, indirect and synthetic holdings of that institution of the Common Equity Tier 1 instruments of those entities that in aggregate are equal to or less than 10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:
    1. Article 32 to 35;
    2. points (a) to (h), points (k)(ii) to (v) and point (l), of Article 36(1) excluding deferred tax assets that rely on future profitability and arise from temporary differences.

2. For the purposes of paragraph 1, the threshold amount shall be equal to the amount referred to in point (a) of this paragraph multiplied by the percentage referred to in point (b) of this paragraph:

  1. the residual amount of Common Equity Tier 1 items after applying the adjustments and deductions in Articles 32 to 36 in full and without applying the threshold exemptions specified in this Article;
  2. 17,65 %.

3. For the purposes of paragraph 1, an institution shall determine the portion of deferred tax assets in the total amount of items that is not required to be deducted by dividing the amount specified in point (a) of this paragraph by the amount specified in point (b) of this paragraph:

  1. the amount of deferred tax assets that are dependent on future profitability and arise from temporary differences, and in aggregate are equal to or less than 10 % of the Common Equity Tier 1 items of the institution;
  2. the sum of the following:
    1. the amount referred to in point (a);
    2. the amount of direct, indirect and synthetic holdings by the institution of the own funds instruments of financial sector entities in which the institution has a significant investment, and in aggregate are equal to or less than 10 % of the Common Equity Tier 1 items of the institution.

The proportion of significant investments in the total amount of items that is not required to be deducted is equal to one minus the proportion referred to in the first subparagraph.

4. The amounts of the items that are not deducted pursuant to paragraph 1 shall be risk weighted at 250 %. 

 

Article 49

Requirement for deduction where consolidation or supplementary supervision is applied

1. For the purposes of calculating own funds on an individual basis, a sub-consolidated basis and a consolidated basis, where the GFSC requires or permits institutions to apply method 1, 2 or 3 in Schedule 1 to the Financial Services (Financial Conglomerates) Regulations 2020, the GFSC may permit institutions not to deduct the holdings of own funds instruments of a financial sector entity in which the parent institution, parent financial holding company or parent mixed financial holding company or institution has a significant investment, provided that the conditions laid down in points (a) to (e) of this paragraph are met:

  1. the financial sector entity is an insurance undertaking, a re-insurance undertaking or an insurance holding company;
  2. that insurance undertaking, re-insurance undertaking or insurance holding company is included in the same supplementary supervision under the Financial Services (Financial Conglomerates) Regulations 2020 as the parent institution, parent financial holding company or parent mixed financial holding company or institution that has the holding;
  3. the institution has received the prior permission of the GFSC;
  4. prior to granting the permission referred to in point (c), and on a continuing basis, the GFSC is satisfied that the level of integrated management, risk management and internal control regarding the entities that would be included in the scope of consolidation under method 1, 2 or 3 is adequate;
  5. the holdings in the entity belong to one of the following:
    1. the parent credit institution;
    2. the parent financial holding company;
    3. the parent mixed financial holding company;
    4. the institution;
    5. a subsidiary of one of the entities referred to in points (i) to (iv) that is included in the scope of consolidation pursuant to Chapter 2 of Title II of Part One.

The method chosen shall be applied in a consistent manner over time.

2. For the purposes of calculating own funds on an individual basis and a sub-consolidated basis, institutions subject to supervision on a consolidated basis in accordance with Chapter 2 of Title II of Part One shall not deduct holdings of own funds instruments issued by financial sector entities included in the scope of consolidated supervision, unless the GFSC determines those deductions to be required for specific purposes, in particular structural separation of banking activities and resolution planning.

This paragraph shall not apply when calculating own funds for the purposes of the requirements laid down in Articles 92a and 92b, which shall be calculated in accordance with the deduction framework set out in Article 72e(4). 

3. Omitted

4. The holdings in respect of which deduction is not made in accordance with paragraph 1 or 2 shall qualify as exposures and shall be risk weighted in accordance with Chapter 2 or 3 of Title II of Part Three, as applicable.

5. Where an institution applies method 1, 2 or 3 in Schedule 1 to the Financial Services (Financial Conglomerates) Regulations 2020 , the institution shall disclose the supplementary own funds requirement and capital adequacy ratio of the financial conglomerate as calculated in accordance with those Regulations.

6. The Minister may make technical standards specifying for the purposes of this Article the conditions of application of the technical calculation methods set out in Schedule 1 to the Financial Services (Financial Conglomerates) Regulations 2020 for the purposes of the alternatives to deduction referred to in paragraph 1. 

 

Article 50 

Common Equity Tier 1 capital

The Common Equity Tier 1 capital of an institution shall consist of Common Equity Tier 1 items after the application of the adjustments required by Articles 32 to 35, the deductions pursuant to Article 36 and the exemptions and alternatives laid down in Articles 48, 49 and 79.

 

Article 51 

Additional Tier 1 items

Additional Tier 1 items shall consist of the following:

  1. capital instruments, where the conditions laid down in Article 52(1) are met;
  2. the share premium accounts related to the instruments referred to in point (a).

Instruments included under point (a) shall not qualify as Common Equity Tier 1 or Tier 2 items.

 

Article 52

Additional Tier 1 instruments

1. Capital instruments shall qualify as Additional Tier 1 instruments only if the following conditions are met:

  1. the instruments are directly issued by an institution and fully paid up; 
  2. the instruments are not owned by any of the following:
    1. the institution or its subsidiaries;
    2. an undertaking in which the institution has a participation in the form of ownership, direct or by way of control, of 20 % or more of the voting rights or capital of that undertaking;
  3. the acquisition of ownership of the instruments is not funded directly or indirectly by the institution; 
  4. the instruments rank below Tier 2 instruments in the event of the insolvency of the institution;
  5. the instruments are neither secured nor subject to a guarantee that enhances the seniority of the claims by any of the following:
    1. the institution or its subsidiaries;
    2. the parent undertaking of the institution or its subsidiaries;
    3. the parent financial holding company or its subsidiaries;
    4. the mixed activity holding company or its subsidiaries;
    5. the mixed financial holding company or its subsidiaries;
    6. any undertaking that has close links with entities referred to in points (i) to (v);
  6. the instruments are not subject to any arrangement, contractual or otherwise, that enhances the seniority of the claim under the instruments in insolvency or liquidation;
  7. the instruments are perpetual and the provisions governing them include no incentive for the institution to redeem them;
  8. where the instruments include one or more early redemption options including call options, the options are exercisable at the sole discretion of the issuer; 
  9. the instruments may be called, redeemed or repurchased only where the conditions laid down in Article 77 are met, and not before five years after the date of issuance except where the conditions laid down in Article 78(4) are met;
  10. the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would be called, redeemed or repurchased, as applicable, by the institution other than in the case of the insolvency or liquidation of the institution and the institution does not otherwise provide such an indication; 
  11. the institution does not indicate explicitly or implicitly that the competent authority would consent to a request to call, redeem or repurchase the instruments;
  12. distributions under the instruments meet the following conditions:
    1. they are paid out of distributable items;
    2. the level of distributions made on the instruments will not be amended on the basis of the credit standing of the institution or its parent undertaking;
    3. the provisions governing the instruments give the institution full discretion at all times to cancel the distributions on the instruments for an unlimited period and on a non-cumulative basis, and the institution may use such cancelled payments without restriction to meet its obligations as they fall due;
    4. cancellation of distributions does not constitute an event of default of the institution;
    5. the cancellation of distributions imposes no restrictions on the institution;
  13. the instruments do not contribute to a determination that the liabilities of an institution exceed its assets, where such a determination constitutes a test of insolvency under the applicable law of Gibraltar or a third country;
  14. the provisions governing the instruments require that, upon the occurrence of a trigger event, the principal amount of the instruments be written down on a permanent or temporary basis or the instruments be converted to Common Equity Tier 1 instruments;
  15. the provisions governing the instruments include no feature that could hinder the recapitalisation of the institution;
  16. where the issuer is established in a third country and has been designated in accordance with regulation 12 of the Recovery and Resolution Regulations as part of a resolution group the resolution entity of which is established in Gibraltar or where the issuer is established in Gibraltar, the law or contractual provisions governing the instruments require that, upon a decision by the resolution authority to exercise the write-down and conversion powers referred to in regulation 59 of those Regulations , the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted to Common Equity Tier 1 instruments;

    where the issuer is established in a third country and has not been designated in accordance with regulation 12 of the Recovery and Resolution Regulations as part of a resolution group the resolution entity of which is established in Gibraltar, the law or contractual provisions governing the instruments require that, upon a decision by the relevant third-country authority, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted into Common Equity Tier 1 instruments;

  17. where the issuer is established in a third country and has been designated in accordance with regulation 12 of the Recovery and Resolution Regulations as part of a resolution group the resolution entity of which is established in Gibraltar or where the issuer is established in Gibraltar, the instruments may only be issued under, or be otherwise subject to the laws of a third country where, under those laws, the exercise of the write-down and conversion powers referred to in regulation 59 of those Regulations is effective and enforceable on the basis of statutory provisions or legally enforceable contractual provisions that recognise resolution or other write-down or conversion actions;
  18. the instruments are not subject to set-off or netting arrangements that would undermine their capacity to absorb losses.

The condition set out in point (d) of the first subparagraph shall be deemed to be met notwithstanding the fact that the instruments are included in Additional Tier 1 or Tier 2 by virtue of Article 484(3), provided that they rank pari passu.

For the purposes of point (a) of the first subparagraph, only the part of a capital instrument that is fully paid up shall be eligible to qualify as an Additional Tier 1 instrument. 

2. The Minister may make technical standards specifying:

  1. the form and nature of incentives to redeem;
  2. the nature of any write up of the principal amount of an Additional Tier 1 instrument following a write down of its principal amount on a temporary basis;
  3. the procedures and timing for the following:
    1. determining that a trigger event has occurred;
    2. writing up the principal amount of an Additional Tier 1 instrument following a write down of its principal amount on a temporary basis;
  4. features of instruments that could hinder the recapitalisation of the institution;
  5. the use of special purpose entities for indirect issuance of own funds instruments.

 

Article 53 

Restrictions on the cancellation of distributions on Additional Tier 1 instruments and features that could hinder the recapitalisation of the institution

For the purposes of points (l)(v) and (o) of Article 52(1), the provisions governing Additional Tier 1 instruments shall, in particular, not include the following:

  1. a requirement for distributions on the instruments to be made in the event of a distribution being made on an instrument issued by the institution that ranks to the same degree as, or more junior than, an Additional Tier 1 instrument, including a Common Equity Tier 1 instrument;
  2. a requirement for the payment of distributions on Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments to be cancelled in the event that distributions are not made on those Additional Tier 1 instruments;
  3. an obligation to substitute the payment of interest or dividend by a payment in any other form. The institution shall not otherwise be subject to such an obligation.

 

Article 54

Write down or conversion of Additional Tier 1 instruments

1. For the purposes of point (n) of Article 52(1), the following provisions shall apply to Additional Tier 1 instruments:

  1. a trigger event occurs when the Common Equity Tier 1 capital ratio of the institution referred to in point (a) of Article 92(1) falls below either of the following:
    1. 5,125 %;
    2. a level higher than 5,125 %, where determined by the institution and specified in the provisions governing the instrument;
  2. institutions may specify in the provisions governing the instrument one or more trigger events in addition to that referred to in point (a);
  3. where the provisions governing the instruments require them to be converted into Common Equity Tier 1 instruments upon the occurrence of a trigger event, those provisions shall specify either of the following:
    1. the rate of such conversion and a limit on the permitted amount of conversion;
    2. a range within which the instruments will convert into Common Equity Tier 1 instruments;
  4. where the provisions governing the instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down shall reduce all the following:
    1. the claim of the holder of the instrument in the insolvency or liquidation of the institution;
    2. the amount required to be paid in the event of the call or redemption of the instrument;
    3. the distributions made on the instrument; 
  5. where the Additional Tier 1 instruments have been issued by a subsidiary undertaking established in a third country, the 5,125 % or higher trigger referred to in point (a) shall be calculated in accordance with the national law of that third country or contractual provisions governing the instruments, provided that the GFSC, is satisfied that those provisions are at least equivalent to the requirements set out in this Article. 

2. Write down or conversion of an Additional Tier 1 instrument shall, under the applicable accounting framework, generate items that qualify as Common Equity Tier 1 items.

3. The amount of Additional Tier 1 instruments recognised in Additional Tier 1 items is limited to the minimum amount of Common Equity Tier 1 items that would be generated if the principal amount of the Additional Tier 1 instruments were fully written down or converted into Common Equity Tier 1 instruments.

4. The aggregate amount of Additional Tier 1 instruments that is required to be written down or converted upon the occurrence of a trigger event shall be no less than the lower of the following:

  1. the amount required to restore fully the Common Equity Tier 1 ratio of the institution to 5,125 %;
  2. the full principal amount of the instrument.

5. When a trigger event occurs institutions shall do the following:

  1. immediately inform the GFSC;
  2. inform the holders of the Additional Tier 1 instruments;
  3. write down the principal amount of the instruments, or convert the instruments into Common Equity Tier 1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Article.

6. An institution issuing Additional Tier 1 instruments that convert to Common Equity Tier 1 on the occurrence of a trigger event shall ensure that its authorised share capital is at all times sufficient, for converting all such convertible Additional Tier 1 instruments into shares if a trigger event occurs. All necessary authorisations shall be obtained at the date of issuance of such convertible Additional Tier 1 instruments. The institution shall maintain at all times the necessary prior authorisation to issue the Common Equity Tier 1 instruments into which such Additional Tier 1 instruments would convert upon occurrence of a trigger event.

7. An institution issuing Additional Tier 1 instruments that convert to Common Equity Tier 1 on the occurrence of a trigger event shall ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual arrangements. 

 

Article 55 

Consequences of the conditions for Additional Tier 1 instruments ceasing to be met

The following shall apply where, in the case of an Additional Tier 1 instrument, the conditions laid down in Article 52(1) cease to be met:

  1. that instrument shall immediately cease to qualify as an Additional Tier 1 instrument;
  2. the part of the share premium accounts that relates to that instrument shall immediately cease to qualify as an Additional Tier 1 item.

 

Article 56

Deductions from Additional Tier 1 items

Institutions shall deduct the following from Additional Tier 1 items:

  1. direct, indirect and synthetic holdings by an institution of own Additional Tier 1 instruments, including own Additional Tier 1 instruments that an institution could be obliged to purchase as a result of existing contractual obligations;
  2. direct, indirect and synthetic holdings of the Additional Tier 1 instruments of financial sector entities with which the institution has reciprocal cross holdings that the competent authority considers to have been designed to inflate artificially the own funds of the institution;
  3. the applicable amount determined in accordance with Article 60 of direct, indirect and synthetic holdings of the Additional Tier 1 instruments of financial sector entities, where an institution does not have a significant investment in those entities;
  4. direct, indirect and synthetic holdings by the institution of the Additional Tier 1 instruments of financial sector entities where the institution has a significant investment in those entities, excluding underwriting positions held for five working days or fewer;
  5. the amount of items required to be deducted from Tier 2 items pursuant to Article 66 that exceeds the Tier 2 items of the institution;
  6. any tax charge relating to Additional Tier 1 items foreseeable at the moment of its calculation, except where the institution suitably adjusts the amount of Additional Tier 1 items insofar as such tax charges reduce the amount up to which those items may be applied to cover risks or losses.

 

Article 57

Deductions of holdings of own Additional Tier 1 instruments

For the purposes of point (a) of Article 56, institutions shall calculate holdings of own Additional Tier 1 instruments on the basis of gross long positions subject to the following exceptions:

  1. institutions may calculate the amount of holdings of own Additional Tier 1 instruments on the basis of the net long position provided that both the following conditions are met:
    1. the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book;
  2. institutions shall determine the amount to be deducted for direct, indirect or synthetic holdings of index securities by calculating the underlying exposure to own Additional Tier 1 instruments in those indices;
  3. institutions may net gross long positions in own Additional Tier 1 instruments resulting from holdings of index securities against short positions in own Additional Tier 1 instruments resulting from short positions in the underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
    1. the long and short positions are in the same underlying indices;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book;

 

Article 58

Deduction of holdings of Additional Tier 1 instruments of financial sector entities and where an institution has a reciprocal cross holding designed artificially to inflate own funds

Institutions shall make the deductions required by points (b), (c) and (d) of Article 56 in accordance with the following:

  1. holdings of Additional Tier 1 instruments shall be calculated on the basis of the gross long positions;
  2. Additional Tier 1 own-fund insurance items shall be treated as holdings of Additional Tier 1 instruments for the purposes of deduction.

 

Article 59

Deduction of holdings of Additional Tier 1 instruments of financial sector entities 

Institutions shall make the deductions required by points (c) and (d) of Article 56 in accordance with the following:

  1. they may calculate direct, indirect and synthetic holdings of Additional Tier 1 instruments of the financial sector entities on the basis of the net long position in the same underlying exposure provided that both the following conditions are met:
    1. the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year;
    2. either both the short position and the long position are held in the trading book or both are held in the non-trading book.
  2. they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating the underlying exposure to the capital instruments of the financial sector entities in those indices.

 

Article 60

Deduction of holdings of Additional Tier 1 instruments where an institution does not have a significant investment in a financial sector entity

1. For the purposes of point (c) of Article 56, institutions shall calculate the applicable amount to be deducted by multiplying the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b) of this paragraph:

  1. the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities in which the institution does not have a significant investment exceeds 10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:
    1. Article 32 to 35;
    2. points (a) to (g), points (k)(ii) to (v) and point (l) of Article 36(1), excluding deferred tax assets that rely on future profitability and arise from temporary differences;
    3. Articles 44 and 45;
  2. the amount of direct, indirect and synthetic holdings by the institution of the Additional Tier 1 instruments of those financial sector entities in which the institution does not have a significant investment divided by the aggregate amount of all direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of those financial sector entities.

2. Institutions shall exclude underwriting positions held for five working days or fewer from the amount referred to in point (a) of paragraph 1 and from the calculation of the factor referred to in point (b) of paragraph 1.

3. The amount to be deducted pursuant to paragraph 1 shall be apportioned across all Additional Tier 1 instruments held. Institutions shall determine the amount of each Additional Tier 1 instrument to be deducted pursuant to paragraph 1 by multiplying the amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:

  1. the amount of holdings required to be deducted pursuant to paragraph 1;
  2. the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the Additional Tier 1 instruments of financial sector entities in which the institution does not have a significant investment represented by each Additional Tier 1 instrument held.

4. The amount of holdings referred to in point (c) of Article 56 that is equal to or less than 10 % of the Common Equity Tier 1 items of the institution after applying the provisions laid down in points (a)(i), (ii) and (iii) of paragraph 1 shall not be deducted and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three and the requirements laid down in Title IV of Part Three, as applicable.

5. Institutions shall determine the amount of each Additional Tier 1 instrument that is risk weighted pursuant to paragraph 4 by multiplying the amount specified in point (a) of this paragraph by the amount specified in point (b) of this paragraph:

  1. the amount of holdings required to be risk weighted pursuant to paragraph 4;
  2. the proportion resulting from the calculation in point (b) of paragraph 3.

 

Article 61 

Additional Tier 1 capital

The Additional Tier 1 capital of an institution shall consist of Additional Tier 1 items after the deduction of the items referred to in Article 56 and the application of Article 79.

 

Article 62

Tier 2 items

Tier 2 items shall consist of the following:

  1. capital instruments where the conditions set out in Article 63 are met, and to the extent specified in Article 64;
  2. the share premium accounts related to instruments referred to in point (a);
  3. for institutions calculating risk-weighted exposure amounts in accordance with Chapter 2 of Title II of Part Three, general credit risk adjustments, gross of tax effects, of up to 1,25 % of risk-weighted exposure amounts calculated in accordance with Chapter 2 of Title II of Part Three;
  4. for institutions calculating risk-weighted exposure amounts under Chapter 3 of Title II of Part Three, positive amounts, gross of tax effects, resulting from the calculation laid down in Articles 158 and 159 up to 0,6 % of risk-weighted exposure amounts calculated under Chapter 3 of Title II of Part Three.

Items included under point (a) shall not qualify as Common Equity Tier 1 or Additional Tier 1 items.

 

Article 63

Tier 2 instruments

Capital instruments shall qualify as Tier 2 instruments, provided that the following conditions are met: 

  1. the instruments are directly issued by an institution and fully paid up;
  2. the instruments are not owned by any of the following:
    1. the institution or its subsidiaries;
    2. an undertaking in which the institution has participation in the form of ownership, direct or by way of control, of 20 % or more of the voting rights or capital of that undertaking;
  3. the acquisition of ownership of the instruments is not funded directly or indirectly by the institution;
  4. he claim on the principal amount of the instruments under the provisions governing the instruments ranks below any claim from eligible liabilities instruments;
  5. the instruments are not secured or are not subject to a guarantee that enhances the seniority of the claim by any of the following:
    1. the institution or its subsidiaries;
    2. the parent undertaking of the institution or its subsidiaries;
    3. the parent financial holding company or its subsidiaries;
    4. the mixed activity holding company or its subsidiaries;
    5. the mixed financial holding company or its subsidiaries;
    6. any undertaking that has close links with entities referred to in points (i) to (v);
  6. the instruments are not subject to any arrangement that otherwise enhances the seniority of the claim under the instruments;
  7. the instruments have an original maturity of at least five years;
  8. the provisions governing the instruments do not include any incentive for their principal amount to be redeemed or repaid, as applicable by the institution prior to their maturity;
  9. where the instruments include one or more early repayment options, including call options, the options are exercisable at the sole discretion of the issuer;
  10. the instruments may be called, redeemed, repaid or repurchased early only where the conditions set out in Article 77 are met, and not before five years after the date of issuance, except where the conditions set out in Article 78(4) are met;
  11. the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would be called, redeemed, repaid or repurchased early, as applicable, by the institution other than in the case of the insolvency or liquidation of the institution and the institution does not otherwise provide such an indication;
  12. the provisions governing the instruments do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in the case of the insolvency or liquidation of the institution;
  13. the level of interest or dividends payments, as applicable, due on the instruments will not be amended on the basis of the credit standing of the institution or its parent undertaking;
  14. where the issuer is established in a third country and has been designated in accordance with regulation 12 of the Recovery and Resolution Regulations as part of a resolution group the resolution entity of which is established in Gibraltar or where the issuer is established in Gibraltar, the law or contractual provisions governing the instruments require that, upon a decision by the resolution authority to exercise the write-down and conversion powers referred to in regulation 59 of those Regulations , the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted to Common Equity Tier 1 instruments;

    where the issuer is established in a third country and has not been designated in accordance with regulation 12 of the Recovery and Resolution Regulations as a part of a resolution group the resolution entity of which is established in Gibraltar, the law or contractual provisions governing the instruments require that, upon a decision by the relevant third-country authority, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted into Common Equity Tier 1 instruments;

  15. where the issuer is established in a third country and has been designated in accordance with regulation 12 of the Recovery and Resolution Regulations as part of a resolution group the resolution entity of which is established in Gibraltar or where the issuer is established in Gibraltar, the instruments may only be issued under, or be otherwise subject to the laws of a third country where, under those laws, the exercise of the write-down and conversion powers referred to in regulation 59 of those Regulations is effective and enforceable on the basis of statutory provisions or legally enforceable contractual provisions that recognise resolution or other write-down or conversion actions;
  16. the instruments are not subject to set-off or netting arrangements that would undermine their capacity to absorb losses. 

For the purposes of point (a) of the first paragraph, only the part of the capital instrument that is fully paid up shall be eligible to qualify as a Tier 2 instrument.

 

Article 64 

Amortisation of Tier 2 instruments

1. The full amount of Tier 2 instruments with a residual maturity of more than five years shall qualify as Tier 2 items.

2. The extent to which Tier 2 instruments qualify as Tier 2 items during the final five years of maturity of the instruments is calculated by multiplying the result derived from the calculation referred to in point (a) by the amount referred to in point (b) as follows:

  1. the carrying amount of the instruments on the first day of the final five-year period of their contractual maturity divided by the number of days in that period;
  2. the number of remaining days of contractual maturity of the instruments.

 

Article 65

Consequences of the conditions for Tier 2 instruments ceasing to be met

Where in the case of a Tier 2 instrument the conditions laid down in Article 63 cease to be met, the following shall apply:

  1. that instrument shall immediately cease to qualify as a Tier 2 instrument;
  2. the part of the share premium accounts that relate to that instrument shall immediately cease to qualify as Tier 2 items.

 

Article 66

Deductions from Tier 2 items 

The following shall be deducted from Tier 2 items:

  1. direct, indirect and synthetic holdings by an institution of own Tier 2 instruments, including own Tier 2 instruments that an institution could be obliged to purchase as a result of existing contractual obligations;
  2. direct, indirect and synthetic holdings of the Tier 2 instruments of financial sector entities with which the institution has reciprocal cross holdings that the competent authority considers to have been designed to inflate artificially the own funds of the institution;
  3. the applicable amount determined in accordance with Article 70 of direct, indirect and synthetic holdings of the Tier 2 instruments of financial sector entities, where an institution does not have a significant investment in those entities;
  4. direct, indirect and synthetic holdings by the institution of the Tier 2 instruments of financial sector entities where the institution has a significant investment in those entities, excluding underwriting positions held for fewer than five working days;
  5. the amount of items required to be deducted from eligible liabilities items pursuant to Article 72e that exceeds the eligible liabilities items of the institution.

 

Article 67

Deductions of holdings of own Tier 2 instruments

For the purposes of point (a) of Article 66, institutions shall calculate holdings on the basis of the gross long positions subject to the following exceptions:

  1. institutions may calculate the amount of holdings on the basis of the net long position provided that both the following conditions are met:
    1. the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book;
  2. institutions shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating the underlying exposure to own Tier 2 instruments in those indices;
  3. institutions may net gross long positions in own Tier 2 instruments resulting from holdings of index securities against short positions in own Tier 2 instruments resulting from short positions in the underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
    1. the long and short positions are in the same underlying indices;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book.

 

Article 68

Deduction of holdings of Tier 2 instruments of financial sector entities and where an institution has a reciprocal cross holding designed artificially to inflate own funds

Institutions shall make the deductions required by points (b), (c) and (d) of Article 66 in accordance with the following provisions:

  1. holdings of Tier 2 instruments shall be calculated on the basis of the gross long positions;
  2. holdings of Tier 2 own-fund insurance items and Tier 3 own-fund insurance items shall be treated as holdings of Tier 2 instruments for the purposes of deduction.

 

Article 69 

Deduction of holdings of Tier 2 instruments of financial sector entities 

Institutions shall make the deductions required by points (c) and (d) of Article 66 in accordance with the following:

  1. they may calculate direct, indirect and synthetic holdings of Tier 2 instruments of the financial sector entities on the basis of the net long position in the same underlying exposure provided that both the following conditions are met:
    1. the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year;
    2. either both the long position and the short position are held in the trading book or both are held in the non-trading book;
  2. they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by looking through to the underlying exposure to the capital instruments of the financial sector entities in those indices.

 

Article 70

Deduction of Tier 2 instruments where an institution does not have a significant investment in a relevant entity

1. For the purposes of point (c) of Article 66, institutions shall calculate the applicable amount to be deducted by multiplying the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b) of this paragraph:

  1. the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities in which the institution does not have a significant investment exceeds 10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:
    1. Articles 32 to 35;
    2. points (a) to (g), points (k)(ii) to (v) and point (l) of Article 36(1), excluding the amount to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences;
    3. Articles 44 and 45;
  2. the amount of direct, indirect and synthetic holdings by the institution of the Tier 2 instruments of financial sector entities in which the institution does not have a significant investment divided by the aggregate amount of all direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of those financial sector entities.

2. Institutions shall exclude underwriting positions held for five working days or fewer from the amount referred to in point (a) of paragraph 1 and from the calculation of the factor referred to in point (b) of paragraph 1.

3. The amount to be deducted pursuant to paragraph 1 shall be apportioned across each Tier 2 instrument held. Institutions shall determine the amount to be deducted from each Tier 2 instrument that is deducted pursuant to paragraph 1 by multiplying the amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:

  1. the total amount of holdings required to be deducted pursuant to paragraph 1;
  2. the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the Tier 2 instruments of financial sector entities in which the institution does not have a significant investment represented by each Tier 2 instrument held.

4. The amount of holdings referred to in point (c) of Article 66(1) that is equal to or less than 10 % of the Common Equity Tier 1 items of the institution after applying the provisions laid down in points (a)(i) to (iii) of paragraph 1 shall not be deducted and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three and the requirements laid down in Title IV of Part Three, as applicable.

5. Institutions shall determine the amount of each Tier 2 instrument that is risk weighted pursuant to paragraph 4 by multiplying the amount specified in point (a) of this paragraph by the amount specified in point (b) of this paragraph:

  1. the amount of holdings required to be risk weighted pursuant to paragraph 4;
  2. the proportion resulting from the calculation in point (b) of paragraph 3. 

 

Article 71 

Tier 2 capital 

The Tier 2 capital of an institution shall consist of the Tier 2 items of the institution after the deductions referred to in Article 66 and the application of Article 79.

 

Article 72

Own funds

The own funds of an institution shall consist of the sum of its Tier 1 capital and Tier 2 capital.

 

Article 72a

Eligible liabilities items

1. Eligible liabilities items shall consist of the following, unless they fall into any of the categories of excluded liabilities laid down in paragraph 2 of this Article, and to the extent specified in Article 72c:

  1. eligible liabilities instruments where the conditions set out in Article 72b are met, to the extent that they do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 items;
  2. Tier 2 instruments with a residual maturity of at least one year, to the extent that they do not qualify as Tier 2 items in accordance with Article 64.

2. The following liabilities shall be excluded from eligible liabilities items:

  1. covered deposits;
  2. sight deposits and short term deposits with an original maturity of less than one year;
  3. the part of eligible deposits from natural persons and micro, small and medium-sized enterprises which exceeds the coverage level referred to section 214 of the Act;
  4. deposits that would be eligible deposits from natural persons, micro, small and medium–sized enterprises if they were not made through branches located outside Gibraltar of institutions established in Gibraltar;
  5. secured liabilities, including covered bonds and liabilities in the form of financial instruments used for hedging purposes that form an integral part of the cover pool and that in accordance with the law of Gibraltar are secured in a manner similar to covered bonds, provided that all secured assets relating to a covered bond cover pool remain unaffected, segregated and with enough funding and excluding any part of a secured liability or a liability for which collateral has been pledged that exceeds the value of the assets, pledge, lien or collateral against which it is secured;
  6. any liability that arises by virtue of the holding of client assets or client money including client assets or client money held on behalf of collective investment undertakings, provided that such a client is protected under the applicable insolvency law;
  7. any liability that arises by virtue of a fiduciary relationship between the resolution entity or any of its subsidiaries (as fiduciary) and another person (as beneficiary), provided that such a beneficiary is protected under the applicable insolvency or civil law;
  8. liabilities to institutions, excluding liabilities to entities that are part of the same group, with an original maturity of less than seven days;
  9. liabilities with a remaining maturity of less than seven days, owed to:
    1. systems or system operators designated in accordance with regulation 5 of the Financial Services (Financial Markets and Insolvency: Settlement Finality) Regulations 2020;
    2. participants, as defined in regulation 2(1) of the Financial Services (Financial Markets and Insolvency: Settlement Finality) Regulations 2020, in a system designated in accordance with regulation 5 of those Regulations and arising from the participation in such a system; or
    3. third-country CCPs recognised in accordance with Article 25 of EMIR;
  10. a liability to any of the following:
    1. an employee in relation to accrued salary, pension benefits or other fixed remuneration, except for the variable component of the remuneration that is not regulated by a collective bargaining agreement, and except for the variable component of the remuneration of material risk takers within the scope of regulation 49(1) of the CICR Regulations;
    2. a commercial or trade creditor where the liability arises from the provision to the institution or the parent undertaking of goods or services that are critical to the daily functioning of the institution's or parent undertaking's operations, including IT services, utilities and the rental, servicing and upkeep of premises;
    3. tax and social security authorities, provided that those liabilities are preferred under the applicable law;
    4. deposit guarantee schemes where the liability arises from contributions due in accordance with Chapter 3 of Part 15 of the Act;
  11. liabilities arising from derivatives;
  12. liabilities arising from debt instruments with embedded derivatives.

For the purposes of point (l) of the first subparagraph, debt instruments containing early redemption options exercisable at the discretion of the issuer or of the holder, and debt instruments with variable interests derived from a broadly used reference rate such as Euribor or Libor, shall not be considered as debt instruments with embedded derivatives solely because of such features.

 

 

Article 72b

Eligible liabilities instruments

1. Liabilities shall qualify as eligible liabilities instruments, provided that they comply with the conditions set out in this Article and only to the extent specified in this Article.

2. Liabilities shall qualify as eligible liabilities instruments, provided that all the following conditions are met:

  1. the liabilities are directly issued or raised, as applicable, by an institution and are fully paid up;
  2. the liabilities are not owned by any of the following:
    1. the institution or an entity included in the same resolution group;
    2. an undertaking in which the institution has a direct or indirect participation in the form of ownership, direct or by way of control, of 20 % or more of the voting rights or capital of that undertaking;
  3. the acquisition of ownership of the liabilities is not funded directly or indirectly by the resolution entity;
  4. the claim on the principal amount of the liabilities under the provisions governing the instruments is wholly subordinated to claims arising from the excluded liabilities referred to in Article 72a(2); that subordination requirement shall be considered to be met in any of the following situations:
    1. the contractual provisions governing the liabilities specify that in the event of normal insolvency proceedings as defined in regulation 3(1) of the Recovery and Resolution Regulations, the claim on the principal amount of the instruments ranks below claims arising from any of the excluded liabilities referred to in Article 72a(2) of this Regulation;
    2. the applicable law specifies that in the event of normal insolvency proceedings as defined in regulation 3(1) of the Recovery and Resolution Regulations, the claim on the principal amount of the instruments ranks below claims arising from any of the excluded liabilities referred to in Article 72a(2) of this Regulation;
    3. the instruments are issued by a resolution entity which does not have on its balance sheet any excluded liabilities as referred to in Article 72a(2) of this Regulation that rank pari passu or junior to eligible liabilities instruments;
  5. the liabilities are neither secured, nor subject to a guarantee or any other arrangement that enhances the seniority of the claim by any of the following:
    1. the institution or its subsidiaries;
    2. the parent undertaking of the institution or its subsidiaries;
    3. any undertaking that has close links with entities referred to in points (i) and (ii);
  6. the liabilities are not subject to set-off or netting arrangements that would undermine their capacity to absorb losses in resolution;
  7. the provisions governing the liabilities do not include any incentive for their principal amount to be called, redeemed or repurchased prior to their maturity or repaid early by the institution, as applicable, except in the cases referred to in Article 72c(3);
  8. the liabilities are not redeemable by the holders of the instruments prior to their maturity, except in the cases referred to in Article 72c(2);
  9. subject to Article 72c(3) and (4), where the liabilities include one or more early repayment options, including call options, the options are exercisable at the sole discretion of the issuer, except in the cases referred to in Article 72c(2);
  10. the liabilities may only be called, redeemed, repaid or repurchased early where the conditions set out in Articles 77 and 78a are met;
  11. the provisions governing the liabilities do not indicate explicitly or implicitly that the liabilities would be called, redeemed, repaid or repurchased early, as applicable by the resolution entity other than in the case of the insolvency or liquidation of the institution and the institution does not otherwise provide such an indication;
  12. the provisions governing the liabilities do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in the case of the insolvency or liquidation of the resolution entity;
  13. the level of interest or dividend payments, as applicable, due on the liabilities is not amended on the basis of the credit standing of the resolution entity or its parent undertaking;
  14. for instruments issued after 28 June 2021 the relevant contractual documentation and, where applicable, the prospectus related to the issuance explicitly refer to the possible exercise of the write-down and conversion powers in accordance with regulation 48 of the Recovery and Resolution Regulations.

For the purposes of point (a) of the first subparagraph, only the parts of liabilities that are fully paid up shall be eligible to qualify as eligible liabilities instruments.

For the purposes of point (d) of the first subparagraph of this Article, where some of the excluded liabilities referred to in Article 72a(2) are subordinated to ordinary unsecured claims under national insolvency law, inter alia, due to being held by a creditor who has close links with the debtor, by being or having been a shareholder, in a control or group relationship, a member of the management body or related to any of those persons, subordination shall not be assessed by reference to claims arising from such excluded liabilities.

3. In addition to the liabilities referred to in paragraph 2 of this Article, the resolution authority may permit liabilities to qualify as eligible liabilities instruments up to an aggregate amount that does not exceed 3,5 % of the total risk exposure amount calculated in accordance with Article 92(3) and (4), provided that:

  1. all the conditions set out in paragraph 2 except for the condition set out in point (d) of the first subparagraph of paragraph 2 are met;
  2. the liabilities rank pari passu with the lowest ranking excluded liabilities referred to in Article 72a(2) with the exception of the excluded liabilities that are subordinated to ordinary unsecured claims under Gibraltar insolvency law referred to in the third subparagraph of paragraph 2 of this Article; and
  3. the inclusion of those liabilities in eligible liabilities items would not give rise to a material risk of a successful legal challenge or of valid compensation claims as assessed by the resolution authority in relation to the principles set out in regulations 34(1)(g) and 75 of the Recovery and Resolution Regulations.

4. The resolution authority may permit liabilities to qualify as eligible liabilities instruments in addition to the liabilities referred to in paragraph 2, provided that:

  1. the institution is not permitted to include in eligible liabilities items liabilities referred to in paragraph 3;
  2. all the conditions set out in paragraph 2, except for the condition set out in point (d) of the first subparagraph of paragraph 2, are met;
  3. the liabilities rank pari passu or are senior to the lowest ranking excluded liabilities referred to in Article 72a(2), with the exception of the excluded liabilities subordinated to ordinary unsecured claims under Gibraltar insolvency law referred to in the third subparagraph of paragraph 2 of this Article;
  4. on the balance sheet of the institution, the amount of the excluded liabilities referred to in Article 72a(2) which rank pari passu or below those liabilities in insolvency does not exceed 5 % of the amount of the own funds and eligible liabilities of the institution;
  5. the inclusion of those liabilities in eligible liabilities items would not give rise to a material risk of a successful legal challenge or of valid compensation claims as assessed by the resolution authority in relation to the principles set out in regulations 34(1)(g) and 75 of the Recovery and Resolution Regulations.

5. The resolution authority may only permit an institution to include liabilities referred to either in paragraph 3 or 4 as eligible liabilities items.

6. The resolution authority shall consult the competent authority when examining whether the conditions set out in this Article are fulfilled.

7. The Minister may make technical standards specifying:

  1. the applicable forms and nature of indirect funding of eligible liabilities instruments;
  2. the form and nature of incentives to redeem for the purposes of the condition set out in point (g) of the first subparagraph of paragraph 2 of this Article and Article 72c(3).

Those technical standards shall be aligned with the technical standards referred to in point (a) of Article 28(5) and in point (a) of Article 52(2).

 

Article 72c

Amortisation of eligible liabilities instruments

1. Eligible liabilities instruments with a residual maturity of at least one year shall fully qualify as eligible liabilities items.

Eligible liabilities instruments with a residual maturity of less than one year shall not qualify as eligible liabilities items.

2. For the purposes of paragraph 1, where a eligible liabilities instrument includes a holder redemption option exercisable prior to the original stated maturity of the instrument, the maturity of the instrument shall be defined as the earliest possible date on which the holder can exercise the redemption option and request redemption or repayment of the instrument.

3. For the purposes of paragraph 1, where an eligible liabilities instrument includes an incentive for the issuer to call, redeem, repay or repurchase the instrument prior to the original stated maturity of the instrument, the maturity of the instrument shall be defined as the earliest possible date on which the issuer can exercise that option and request redemption or repayment of the instrument.

4. For the purposes of paragraph 1, where an eligible liabilities instrument includes early redemption options that are exercisable at the sole discretion of the issuer prior to the original stated maturity of the instrument, but where the provisions governing the instrument do not include any incentive for the instrument to be called, redeemed, repaid or repurchased prior to its maturity and do not include any option for redemption or repayment at the discretion of the holders, the maturity of the instrument shall be defined as the original stated maturity.

 

Article 72d

Consequences of the eligibility conditions ceasing to be met

Where, in the case of an eligible liabilities instrument, the applicable conditions set out in Article 72b cease to be met, the liabilities shall immediately cease to qualify as eligible liabilities instruments.

Liabilities referred to in Article 72b(2) may continue to count as eligible liabilities instruments as long as they qualify as eligible liabilities instruments under Article 72b(3) or (4).

 

Article 72e

Deductions from eligible liabilities items

1. Institutions that are subject to Article 92a shall deduct the following from eligible liabilities items:

  1. direct, indirect and synthetic holdings by the institution of own eligible liabilities instruments, including own liabilities that that institution could be obliged to purchase as a result of existing contractual obligations;
  2. direct, indirect and synthetic holdings by the institution of eligible liabilities instruments of G-SII entities with which the institution has reciprocal cross holdings that the competent authority considers to have been designed to artificially inflate the loss absorption and recapitalisation capacity of the resolution entity;
  3. the applicable amount determined in accordance with Article 72i of direct, indirect and synthetic holdings of eligible liabilities instruments of G-SII entities, where the institution does not have a significant investment in those entities;
  4. direct, indirect and synthetic holdings by the institution of eligible liabilities instruments of G-SII entities, where the institution has a significant investment in those entities, excluding underwriting positions held for five business days or fewer.

2. For the purposes of this Section, all instruments ranking pari passu with eligible liabilities instruments shall be treated as eligible liabilities instruments, with the exception of instruments ranking pari passu with instruments recognised as eligible liabilities pursuant to Article 72b(3) and (4).

3. For the purposes of this Section, institutions may calculate the amount of holdings of the eligible liabilities instruments referred to in Article 72b(3) as follows:

where:

 
h = the amount of holdings of the eligible liabilities instruments referred to in Article 72b(3);
 
i the index denoting the issuing institution;
 
H i the total amount of holdings of eligible liabilities of the issuing institution i referred to in Article 72b(3);
 
l i the amount of liabilities included in eligible liabilities items by the issuing institution i within the limits specified in Article 72b(3) according to the latest disclosures by the issuing institution; and
L i the total amount of the outstanding liabilities of the issuing institution i referred to in Article 72b(3) according to the latest disclosures by the issuer.

4. Where a Gibraltar parent institution or a parent institution in Gibraltar that is subject to Article 92a has direct, indirect or synthetic holdings of own funds instruments or eligible liabilities instruments of one or more subsidiaries which do not belong to the same resolution group as that parent institution, the resolution authority after duly considering the opinion of any relevant third country resolution authority, may permit the parent institution to deduct such holdings by deducting a lower amount specified by the resolution authority of that parent institution. That adjusted amount shall be at least equal to the amount (m) calculated as follows:

m i = max{0; OP i + LP i – max{0; β · [O i + L i – r i · aRWA i ]}}

where:

the index denoting the subsidiary;
 
OP the amount of own funds instruments issued by subsidiary i and held by the parent institution;
 
LP the amount of eligible liabilities items issued by subsidiary i and held by the parent institution;
 
β  percentage of own funds instruments and eligible liabilities items issued by subsidiary i and held by the parent undertaking;
 
O the amount of own funds of subsidiary i, not taking into account the deduction calculated in accordance with this paragraph;
 
L the amount of eligible liabilities of subsidiary i, not taking into account the deduction calculated in accordance with this paragraph;
 
r the ratio applicable to subsidiary i at the level of its resolution group in accordance with point (a) of Article 92a(1) of this Regulation and regulation 45D of the Recovery and Resolution Regulations; and
 
aRWA the total risk exposure amount of the G-SII entity i calculated in accordance with Article 92(3) and (4), taking into account the adjustments set out in Article 12a.

Where the parent institution is allowed to deduct the adjusted amount in accordance with the first subparagraph, the difference between the amount of holdings of own funds instruments and eligible liabilities instruments referred to in the first subparagraph and that adjusted amount shall be deducted by the subsidiary.

 

Article 72f

Deduction of holdings of own eligible liabilities instruments

For the purposes of point (a) of Article 72e(1), institutions shall calculate holdings on the basis of the gross long positions subject to the following exceptions:

  1. institutions may calculate the amount of holdings on the basis of the net long position, provided that both the following conditions are met:
    1. the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book;
  2. institutions shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating the underlying exposure to own eligible liabilities instruments in those indices;
  3. institutions may net gross long positions in own eligible liabilities instruments resulting from holdings of index securities against short positions in own eligible liabilities instruments resulting from short positions in underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
    1. the long and short positions are in the same underlying indices;
    2. either both the long and the short positions are held in the trading book or both are held in the non-trading book.

 

Article 72g

Deduction base for eligible liabilities items

For the purposes of points (b), (c) and (d) of Article 72e(1), institutions shall deduct the gross long positions subject to the exceptions laid down in Articles 72h and 72i.

 

Article 72h 

Deduction of holdings of eligible liabilities of other G-SII entities

Institutions not making use of the exception set out in Article 72j shall make the deductions referred to in points (c) and (d) of Article 72e(1) in accordance with the following:

  1. they may calculate direct, indirect and synthetic holdings of eligible liabilities instruments on the basis of the net long position in the same underlying exposure, provided that both the following conditions are met:
    1. the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year;
    2. either both the long position and the short position are held in the trading book or both are held in the non-trading book;
  2. they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by looking through to the underlying exposure to the eligible liabilities instruments in those indices.

 

Article 72i

Deduction of eligible liabilities where the institution does not have a significant investment in G-SII entities

1. For the purposes of point (c) of Article 72e(1), institutions shall calculate the applicable amount to be deducted by multiplying the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b) of this paragraph:

  1. the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1, Tier 2 instruments of financial sector entities and eligible liabilities instruments of G-SII entities in none of which the institution has a significant investment exceeds 10 % of the Common Equity Tier 1 items of the institution after applying the following:
    1. Articles 32 to 35;
    2. points (a) to (g), points (k)(ii) to (k)(v) and point (l) of Article 36(1), excluding the amount to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences;
    3. Articles 44 and 45;
  2. the amount of direct, indirect and synthetic holdings by the institution of the eligible liabilities instruments of G-SII entities in which the institution does not have a significant investment divided by the aggregate amount of the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1, Tier 2 instruments of financial sector entities and eligible liabilities instruments of G-SII entities in none of which the resolution entity has a significant investment.

2. Institutions shall exclude underwriting positions held for five business days or fewer from the amounts referred to in point (a) of paragraph 1 and from the calculation of the factor in accordance with point (b) of paragraph 1.

3. The amount to be deducted pursuant to paragraph 1 shall be apportioned across each eligible liabilities instrument of a G-SII entity held by the institution. Institutions shall determine the amount of each eligible liabilities instrument that is deducted pursuant to paragraph 1 by multiplying the amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:

  1. the amount of holdings required to be deducted pursuant to paragraph 1;
  2. the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the eligible liabilities instruments of G-SII entities in which the institution does not have a significant investment represented by each eligible liabilities instrument held by the institution.

4. The amount of holdings referred to in point (c) of Article 72e(1) that is equal to or less than 10 % of the Common Equity Tier 1 items of the institution after applying the provisions laid down in points (a)(i), (a)(ii) and (a)(iii) of paragraph 1 of this Article shall not be deducted and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three and the requirements laid down in Title IV of Part Three, as applicable.

5. Institutions shall determine the amount of each eligible liabilities instrument that is risk weighted pursuant to paragraph 4 by multiplying the amount of holdings required to be risk weighted pursuant to paragraph 4 by the proportion resulting from the calculation specified in point (b) of paragraph 3. 

 

Article 72j

Trading book exception from deductions from eligible liabilities items

1. Institutions may decide not to deduct a designated part of their direct, indirect and synthetic holdings of eligible liabilities instruments, that in aggregate and measured on a gross long basis is equal to or less than 5 % of the Common Equity Tier 1 items of the institution after applying Articles 32 to 36, provided that all the following conditions are met:

  1. the holdings are in the trading book;
  2. the eligible liabilities instruments are held for no longer than 30 business days.

2. The amounts of the items that are not deducted pursuant to paragraph 1 shall be subject to own funds requirements for items in the trading book.

3. Where, in the case of holdings not deducted in accordance with paragraph 1, the conditions set out in that paragraph cease to be met, the holdings shall be deducted in accordance with Article 72g without applying the exceptions laid down in Articles 72h and 72i.

 

Article 72k

Eligible liabilities  

The eligible liabilities of an institution shall consist of the eligible liabilities items of the institution after the deductions referred to in Article 72e.

 

Article 72l

Own funds and eligible liabilities

The own funds and eligible liabilities of an institution shall consist of the sum of its own funds and its eligible liabilities.

 

Article 73

Distributions on instruments

1. Capital instruments and liabilities for which an institution has the sole discretion to decide to pay distributions in a form other than cash or own funds instruments shall not be eligible to qualify as Common Equity Tier 1, Additional Tier 1, Tier 2 or eligible liabilities instruments, unless the institution has received the prior permission of the GFSC.

2. The GFSC shall grant the prior permission referred to in paragraph 1 only where it considers all the following conditions to be met:

  1. the ability of the institution to cancel payments under the instrument would not be adversely affected by the discretion referred to in paragraph 1, or by the form in which distributions could be made;
  2. the ability of the capital instrument or of the liability to absorb losses would not be adversely affected by the discretion referred to in paragraph 1, or by the form in which distributions could be made;
  3. the quality of the capital instrument or liability would not otherwise be reduced by the discretion referred to in paragraph 1, or by the form in which distributions could be made.

The GFSC shall consult the resolution authority regarding an institution's compliance with those conditions before granting the prior permission referred to in paragraph 1.

3. Capital instruments and liabilities for which a legal person other than the institution issuing them has the discretion to decide or require that the payment of distributions on those instruments or liabilities shall be made in a form other than cash or own funds instruments shall not be eligible to qualify as Common Equity Tier 1, Additional Tier 1, Tier 2 or eligible liabilities instruments.

4. Institutions may use a broad market index as one of the bases for determining the level of distributions on Additional Tier 1, Tier 2 and eligible liabilities instruments. 

5. Paragraph 4 shall not apply where the institution is a reference entity in that broad market index unless both the following conditions are met:

  1. the institution considers movements in that broad market index not to be significantly correlated to the credit standing of the institution, its parent institution or parent financial holding company or parent mixed financial holding company or parent mixed activity holding company;
  2. the GFSC has not reached a different determination from that referred to in point (a).

6. Institutions shall report and disclose the broad market indices on which their capital instruments and eligible liabilities instruments rely. 

7. The Minister may make technical standards specifying the conditions according to which indices shall be deemed to qualify as broad market indices for the purposes of paragraph 4.

 

Article 74

Holdings of capital instruments issued by regulated financial sector entities that do not qualify as regulatory capital

Institutions shall not deduct from any element of own funds direct, indirect or synthetic holdings of capital instruments issued by a regulated financial sector entity that do not qualify as regulatory capital of that entity. Institutions shall apply risk weights to such holdings in accordance with Chapter 2 or 3 of Title II of Part Three, as applicable.

 

Article 75

Deduction and maturity requirements for short positions

The maturity requirements for short positions referred to in point (a) of Article 45, point (a) of Article 59, point (a) of Article 69 and point (a) of Article 72h shall be considered to be met in respect of positions held where all the following conditions are met: 

  1. the institution has the contractual right to sell on a specific future date to the counterparty providing the hedge the long position that is being hedged;
  2. the counterparty providing the hedge to the institution is contractually obliged to purchase from the institution on that specific future date the long position referred to in point (a).

 

Article 76

Index holdings of capital instruments

1. For the purposes of point (a) of Article 42, point (a) of Article 45, point (a) of Article 57, point (a) of Article 59, point (a) of Article 67, point (a) of Article 69 and point (a) of Article 72h, institutions may reduce the amount of a long position in a capital instrument by the portion of an index that is made up of the same underlying exposure that is being hedged, provided that all the following conditions are met:

  1. either both the long position being hedged and the short position in an index used to hedge that long position are held in the trading book or both are held in the non-trading book;
  2. the positions referred to in point (a) are held at fair value on the balance sheet of the institution;
  3. the short position referred to in point (a) qualifies as an effective hedge under the internal control processes of the institution;
  4. the GFSC assesses the adequacy of the internal control processes referred to in point (c) on at least an annual basis and is satisfied with their continuing appropriateness.

2. Where the competent authority has granted its prior permission, an institution may use a conservative estimate of the underlying exposure of the institution to instruments included in indices as an alternative to an institution calculating its exposure to the items referred to in one or more of the following points:

  1. own Common Equity Tier 1, Additional Tier 1, Tier 2 and eligible liabilities instruments included in indices;
  2. Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities, included in indices;
  3. eligible liabilities instruments of institutions, included in indices.

3. The GFSC shall grant the prior permission referred to in paragraph 2 only where the institution has demonstrated to its satisfaction that it would be operationally burdensome for the institution to monitor its underlying exposure to the items referred to in one or more of the points of paragraph 2, as applicable.

4. The Minister may make technical standards specifying:

  1. when an estimate used as an alternative to the calculation of underlying exposure referred to in paragraph 2 is sufficiently conservative;
  2. the meaning of operationally burdensome for the purposes of paragraph 3.

 

Article 77 

Conditions for reducing own funds and eligible liabilities

1. An institution shall obtain the prior permission of the competent authority to do any of the following:

  1. reduce, redeem or repurchase Common Equity Tier 1 instruments issued by the institution in a manner that is permitted under the applicable law of Gibraltar or a third country;
  2. reduce, distribute or reclassify as another own funds item the share premium accounts related to own funds instruments;
  3. effect the call, redemption, repayment or repurchase of Additional Tier 1 or Tier 2 instruments prior to the date of their contractual maturity.

2. An institution shall obtain the prior permission of the resolution authority to effect the call, redemption, repayment or repurchase of eligible liabilities instruments that are not covered by paragraph 1, prior to the date of their contractual maturity. 

 

Article 78

Supervisory permission to reduce own funds

1. The competent authority shall grant permission for an institution to reduce, call, redeem, repay or repurchase Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments, or to reduce, distribute or reclassify related share premium accounts, where either of the following conditions is met:

  1. before or at the same time as any of the actions referred to in Article 77(1), the institution replaces the instruments or the related share premium accounts referred to in Article 77(1) with own funds instruments of equal or higher quality at terms that are sustainable for the income capacity of the institution;
  2. the institution has demonstrated to the satisfaction of the competent authority that the own funds and eligible liabilities of the institution would, following the action referred to in Article 77(1) of this Regulation, exceed the requirements laid down in this Regulation and in the CICR Regulations and the Recovery and Resolution Regulations by a margin that the competent authority considers necessary.

Where an institution provides sufficient safeguards as to its capacity to operate with own funds above the amounts required in this Regulation and in the CICR Regulations, the competent authority may grant that institution a general prior permission to take any of the actions set out in Article 77(1) of this Regulation, subject to criteria that ensure that any such future action will be in accordance with the conditions set out in points (a) and (b) of this paragraph. That general prior permission shall be granted only for a specified period, which shall not exceed one year, after which it may be renewed. The general prior permission shall be granted for a certain predetermined amount, which shall be set by the competent authority. In the case of Common Equity Tier 1 instruments, that predetermined amount shall not exceed 3 % of the relevant issue and shall not exceed 10 % of the amount by which Common Equity Tier 1 capital exceeds the sum of the Common Equity Tier 1 capital requirements laid down in this Regulation, in the CICR Regulations and the Recovery and Resolution Regulations by a margin that the competent authority considers necessary. In the case of Additional Tier 1 or Tier 2 instruments, that predetermined amount shall not exceed 10 % of the relevant issue and shall not exceed 3 % of the total amount of outstanding Additional Tier 1 or Tier 2 instruments, as applicable.

The competent authority shall withdraw the general prior permission where an institution breaches any of the criteria provided for the purposes of that permission.

2. When assessing the sustainability of the replacement instruments for the income capacity of the institution referred to in point (a) of paragraph 1, competent authorities shall consider the extent to which those replacement capital instruments would be more costly for the institution than those capital instruments or share premium accounts they would replace.

3. Where an institution takes an action referred to in point (a) of Article 77(1) and the refusal of redemption of Common Equity Tier 1 instruments referred to in Article 27 is prohibited by the applicable law of Gibraltar or a third country, the competent authority may waive the conditions set out in paragraph 1 of this Article, provided that the competent authority requires the institution to limit the redemption of such instruments on an appropriate basis.

4. The competent authority may permit institutions to call, redeem, repay or repurchase Additional Tier 1 or Tier 2 instruments or related share premium accounts during the five years following their date of issuance where the conditions set out in paragraph 1 and one of the following conditions is met:

  1. there is a change in the regulatory classification of those instruments that would be likely to result in their exclusion from own funds or reclassification as own funds of lower quality, and both the following conditions are met:
    1. the competent authority considers such a change to be sufficiently certain;
    2. the institution demonstrates to the satisfaction of the competent authority that the regulatory reclassification of those instruments was not reasonably foreseeable at the time of their issuance;
  2. there is a change in the applicable tax treatment of those instruments which the institution demonstrates to the satisfaction of the competent authority is material and was not reasonably foreseeable at the time of their issuance;
  3. the instruments and related share premium accounts are grandfathered under Article 494b;
  4. before or at the same time as the action referred to in Article 77(1), the institution replaces the instruments or related share premium accounts referred to in Article 77(1) with own funds instruments of equal or higher quality at terms that are sustainable for the income capacity of the institution and the competent authority has permitted that action on the basis of the determination that it would be beneficial from a prudential point of view and justified by exceptional circumstances;
  5. the Additional Tier 1 or Tier 2 instruments are repurchased for market making purposes.

5. The Minister may make technical standards specifying: 

  1. the meaning of sustainable for the income capacity of the institution ;
  2. the appropriate bases of limitation of redemption referred to in paragraph 3;
  3. the process including the limits and procedures for granting approval in advance by competent authorities for an action listed in Article 77(1), and data requirements for an application by an institution for the permission of the competent authority to carry out an action listed therein, including the process to be applied in the case of redemption of shares issued to members of cooperative societies, and the time period for processing such an application.

 

Article 78a

Permission to reduce eligible liabilities instruments

1. The resolution authority shall grant permission for an institution to call, redeem, repay or repurchase eligible liabilities instruments where one of the following conditions is met:

  1. before or at the same time as any of the actions referred to in Article 77(2), the institution replaces the eligible liabilities instruments with own funds or eligible liabilities instruments of equal or higher quality at terms that are sustainable for the income capacity of the institution;
  2. the institution has demonstrated to the satisfaction of the resolution authority that the own funds and eligible liabilities of the institution would, following the action referred to in Article 77(2) of this Regulation, exceed the requirements for own funds and eligible liabilities laid down in this Regulation and in the CICR Regulations and the Recovery and Resolution Regulations by a margin that the resolution authority, in agreement with the competent authority, considers necessary;
  3. the institution has demonstrated to the satisfaction of the resolution authority that the partial or full replacement of the eligible liabilities with own funds instruments is necessary to ensure compliance with the own funds requirements laid down in this Regulation and in the CICR Regulations for continuing authorisation.

Where an institution provides sufficient safeguards as to its capacity to operate with own funds and eligible liabilities above the amount of the requirements laid down in this Regulation and in the CICR Regulations and the Recovery and Resolution Regulations, the resolution authority, after consulting the competent authority, may grant that institution a general prior permission to effect calls, redemptions, repayments or repurchases of eligible liabilities instruments, subject to criteria that ensure that any such future action will be in accordance with the conditions set out in points (a) and (b) of this paragraph. That general prior permission shall be granted only for a specified period, which shall not exceed one year, after which it may be renewed. The general prior permission shall be granted for a certain predetermined amount, which shall be set by the resolution authority. Resolution authorities shall inform the competent authorities about any general prior permission granted.

The resolution authority shall withdraw the general prior permission where an institution breaches any of the criteria provided for the purposes of that permission.

2. When assessing the sustainability of the replacement instruments for the income capacity of the institution referred to in point (a) of paragraph 1, the resolution authority shall consider the extent to which those replacement capital instruments or replacement eligible liabilities would be more costly for the institution than those they would replace.

3. The Minister may make technical standards specifying:

  1. the process of cooperation between the competent authority and the resolution authority;
  2. the procedure, including the time limits and information requirements, for granting the permission in accordance with the first subparagraph of paragraph 1;
  3. the procedure, including the time limits and information requirements, for granting the general prior permission in accordance with the second subparagraph of paragraph 1;
  4. the meaning of sustainable for the income capacity of the institution .

For the purposes of point (d) of the first subparagraph of this paragraph, the technical standards shall be aligned with the technical standards referred to in Article 78.

 

Article 79

Temporary waiver from deduction from own funds and eligible liabilities

1. Where an institution holds capital instruments or liabilities that qualify as own funds instruments in a financial sector entity or as eligible liabilities instruments in an institution and where the competent authority considers those holdings to be for the purposes of a financial assistance operation designed to reorganise and restore the viability of that entity or that institution, the competent authority may waive on a temporary basis the provisions on deduction that would otherwise apply to those instruments. 

2. The Minister may make technical standards specifying the concept of temporary for the purposes of paragraph 1 and the conditions according to which a competent authority may deem those temporary holdings to be for the purposes of a financial assistance operation designed to reorganise and save a relevant entity.

 

Article 79a

Assessment of compliance with the conditions for own funds and eligible liabilities instruments 

Institutions shall have regard to the substantial features of instruments and not only their legal form when assessing compliance with the requirements laid down in Part Two. The assessment of the substantial features of an instrument shall take into account all arrangements related to the instruments, even where those are not explicitly set out in the terms and conditions of the instruments themselves, for the purpose of determining that the combined economic effects of such arrangements are compliant with the objective of the relevant provisions.

 

Article 80 

Omitted

 

Article 81

Minority interests that qualify for inclusion in consolidated Common Equity Tier 1 capital

1. Minority interests shall comprise the sum of Common Equity Tier 1 items of a subsidiary where the following conditions are met:

  1. the subsidiary is one of the following:
    1. an institution;
    2. an undertaking that is subject to this Regulation and the CICR Regulations;
    3. an intermediate financial holding company or intermediate mixed financial holding company that is subject to this Regulation on a sub-consolidated basis, or an intermediate investment holding company that is subject to the IFPR Regulations on a consolidated basis; 
    4. an investment firm;
    5. an intermediate financial holding company in a third country that is subject to prudential requirements as stringent as those applied to credit institutions of that third country, where the Minister has determined in accordance with Article 107.4 that those prudential requirements are at least equivalent to those of this Regulation;
  2. the subsidiary is included fully in the consolidation pursuant to Chapter 2 of Title II of Part One;
  3. the Common Equity Tier 1 items, referred to in the introductory part of this paragraph, are owned by persons other than the undertakings included in the consolidation pursuant to Chapter 2 of Title II of Part One.]

2. Minority interests that are funded directly or indirectly, through a special purpose entity or otherwise, by the parent undertaking of the institution, or its subsidiaries shall not qualify as consolidated Common Equity Tier 1 capital. 

 

Article 82

Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds

Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds shall comprise the minority interest, Additional Tier 1 or Tier 2 instruments, as applicable, plus the related retained earnings and share premium accounts, of a subsidiary where the following conditions are met:

  1. the subsidiary is one of the following:
    1. an institution;
    2. an undertaking that is subject to this Regulation and the CICR Regulations;
    3. an intermediate financial holding company or intermediate mixed financial holding company that is subject to this Regulation on a sub-consolidated basis, or an intermediate investment holding company that is subject to the IFPR Regulations on a consolidated basis;
    4. an investment firm;
    5. an intermediate financial holding company in a third country that is subject to prudential requirements as stringent as those applied to credit institutions of that third country, where the Minister has determined in accordance with Article 107.4 that those prudential requirements are at least equivalent to those of this Regulation;
  2. the subsidiary is included fully in the scope of consolidation pursuant to Chapter 2 of Title II of Part One;
  3. those instruments are owned by persons other than the undertakings included in the consolidation pursuant to Chapter 2 of Title II of Part One.

 

Article 83

Qualifying Additional Tier 1 and Tier 2 capital issued by a special purpose entity

1. Additional Tier 1 and Tier 2 instruments issued by a special purpose entity, and the related share premium accounts, are included until  31 December 2021 in qualifying Additional Tier 1, Tier 1 or Tier 2 capital or qualifying own funds, as applicable, only where the following conditions are met: 

  1. the special purpose entity issuing those instruments is included fully in the consolidation pursuant to Chapter 2 of Title II of Part One;
  2. the instruments, and the related share premium accounts, are included in qualifying Additional Tier 1 capital only where the conditions laid down in Article 52(1) are satisfied;
  3. the instruments, and the related share premium accounts, are included in qualifying Tier 2 capital only where the conditions laid down in Article 63 are satisfied;
  4. the only asset of the special purpose entity is its investment in the own funds of the parent undertaking or a subsidiary thereof that is included fully in the consolidation pursuant to Chapter 2 of Title II of Part One, the form of which satisfies the relevant conditions laid down in Articles 52(1) or 63, as applicable.

Where the competent authority considers the assets of a special purpose entity other than its investment in the own funds of the parent undertaking or a subsidiary thereof that is included in the scope of consolidation pursuant to Chapter 2 of Title II of Part One, to be minimal and insignificant for such an entity, the competent authority may waive the condition specified in point (d) of the first subparagraph.

2. The Minister may make technical standards specifying the types of assets that can relate to the operation of special purpose entities and the concepts of minimal and insignificant referred to in the second subparagraph of paragraph 1.

 

Article 84

Minority interests included in consolidated Common Equity Tier 1 capital

1. Institutions must determine the amount of minority interests of a subsidiary that is included in consolidated Common Equity Tier 1 capital by subtracting from the minority interests of that undertaking the result of multiplying the amount in point (a) by the percentage in point (b) as follows: 

  1. the Common Equity Tier 1 capital of the subsidiary minus the lower of the following: 
    1. the amount of Common Equity Tier 1 capital of that subsidiary required to meet the following:

      (aa)   the sum of the requirement laid down Article 92.1(a), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in regulation 140 of the CICR Regulations, the combined buffer requirement defined in regulation 82(1) of those Regulations and any additional local supervisory regulations in third countries so far as those requirements are to be met by Common Equity Tier 1 capital;

      (bb)   where the subsidiary is an investment firm, the sum of the requirement in regulation 14 of the IFPR Regulations, the specific own funds requirements in regulation 91(2)(a) of those Regulations and any additional local supervisory regulations in third countries, so far as those requirements are to be met by Common Equity Tier 1 capital;

    2. the amount of consolidated Common Equity Tier 1 capital that relates to that subsidiary that is required on a consolidated basis to meet the sum of the requirement in Article 92.1(a), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in regulation 140 of the CICR Regulations, the combined buffer requirement defined in regulation 82(1) of those Regulations, and any additional local supervisory regulations in third countries insofar as those requirements are to be met by Common Equity Tier 1 capital;
  2. the minority interests of the subsidiary expressed as a percentage of all Common Equity Tier 1 items of that undertaking.

2. The calculation referred to in paragraph 1 shall be undertaken on a sub-consolidated basis for each subsidiary referred to in Article 81(1).

An institution may choose not to undertake this calculation for a subsidiary referred to in Article 81(1). Where an institution takes such a decision, the minority interest of that subsidiary may not be included in consolidated Common Equity Tier 1 capital.

3. Where the GFSC derogates from the application of prudential requirements on an individual basis under Article 7 or, as applicable, regulation 8 of the IFPR Regulations, minority interests within the subsidiaries to which the waiver is applied shall not be recognised in own funds at the sub-consolidated or at the consolidated level, as applicable. 

4. The Minister may make technical standards specifying the sub-consolidation calculation required in accordance with paragraph 2 of this Article, Articles 85 and 87.

5. The GFSC may grant a waiver from the application of this Article to a parent financial holding company that satisfies all the following conditions:

  1. its principal activity is to acquire holdings;
  2. it is subject to prudential supervision on a consolidated basis;
  3. it consolidates a subsidiary institution in which it has only a minority holding and which is a subsidiary because of section 276 of the Companies Act 2014;
  4. more than 90 % of the consolidated required Common Equity Tier 1 capital arises from the subsidiary institution referred to in point c) calculated on a sub-consolidated basis.

Where, after 28 June 2013 , a parent financial holding company that meets the conditions laid down in the first subparagraph becomes a parent mixed financial holding company, the GFSC may grant the waiver referred to in the first subparagraph to that parent mixed financial holding company provided that it meets the conditions laid down in that subparagraph.

 

Article 85

Qualifying Tier 1 instruments included in consolidated Tier 1 capital

1. Institutions must determine the amount of qualifying Tier 1 capital of a subsidiary that is included in consolidated own funds by subtracting from the qualifying Tier 1 capital of that undertaking the result of multiplying the amount in point (a) by the percentage in point (b) as follows: 

  1. the Tier 1 capital of the subsidiary minus the lower of the following:
    1. the amount of Tier 1 capital of the subsidiary required to meet the following:

      (aa)   the sum of the requirement laid down in Article 92.1(b), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in regulation 140 of the CICR Regulations, the combined buffer requirement defined in regulation 82(1) of those Regulations, and any additional local supervisory regulations in third countries insofar as those requirements are to be met by Tier 1 Capital;

      (bb)   where the subsidiary is an investment firm, the sum of the requirement in regulation 14 of the IFPR Regulations, the specific own funds requirements in regulation 91(2)(a) of those Regulations and any additional local supervisory regulations in third countries, insofar as those requirements are to be met by Common Equity Tier 1 capital;

    2. the amount of consolidated Tier 1 capital that relates to the subsidiary that is required on a consolidated basis to meet the sum of the requirement laid down in Article 92.1(b), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in regulation 140 of the CICR Regulations, the combined buffer requirement defined in regulation 82(1) of those Regulations, and any additional local supervisory regulations in third countries insofar as those requirements are to be met by Tier 1 Capital;
  2. the qualifying Tier 1 capital of the subsidiary expressed as a percentage of all Common Equity Tier 1 and Additional Tier 1 items of that undertaking.

2. The calculation referred to in paragraph 1 shall be undertaken on a sub-consolidated basis for each subsidiary referred to in Article 81(1).

An institution may choose not to undertake this calculation for a subsidiary referred to in Article 81(1). Where an institution takes such a decision, the qualifying Tier 1 capital of that subsidiary may not be included in consolidated Tier 1 capital.

3. Where the GFSC derogates from the application of prudential requirements on an individual basis under Article 7 or, as applicable, regulation 8 of the IFPR Regulations, Tier 1 instruments within the subsidiaries to which the waiver is applied must not be recognised as own funds at the sub-consolidated or at the consolidated level, as applicable.

 

Article 86

Qualifying Tier 1 capital included in consolidated Additional Tier 1 capital

Without prejudice to Article 84 (5) or (6), institutions shall determine the amount of qualifying Tier 1 capital of a subsidiary that is included in consolidated Additional Tier 1 capital by subtracting from the qualifying Tier 1 capital of that undertaking included in consolidated Tier 1 capital the minority interests of that undertaking that are included in consolidated Common Equity Tier 1 capital.

 

Article 87

Qualifying own funds included in consolidated own funds

1. Institutions must determine the amount of qualifying own funds of a subsidiary that is included in consolidated own funds by subtracting from the qualifying own funds of that undertaking the result of multiplying the amount in point (a) by the percentage in point (b) as follows: 

  1. the own funds of the subsidiary minus the lower of the following:
    1. the amount of own of the subsidiary required to meet the following:

      (aa)   the sum of the requirement laid down in Article 92.1(c), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in regulation 140 of the CICR Regulations, the combined buffer requirement defined in regulation 82(1) of those Regulations, and any additional local supervisory regulations in third countries;

      (bb)   where the subsidiary is an investment firm, the sum of the requirement in regulation 14 of the IFPR Regulations, the specific own funds requirements in regulation 91(2)(a) of those Regulations and any additional local supervisory regulations in third countries;

    2. the amount of own funds that relates to the subsidiary that is required on a consolidated basis to meet the sum of the requirement laid down in Article 92.1(c), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in regulation 140 of the CICR Regulations, the combined buffer requirement defined in regulation 82(1) of those Regulations, and any additional local supervisory own funds requirement in third countries;
  2. the qualifying own funds of the undertaking, expressed as a percentage of the sum of all Common Equity Tier 1, Additional Tier 1 items and Tier 2 items (excluding the amounts in Article 62(c) and (d)) of that undertaking.

2. The calculation referred to in paragraph 1 shall be undertaken on a sub-consolidated basis for each subsidiary referred to in Article 81(1).

An institution may choose not to undertake this calculation for a subsidiary referred to in Article 81(1). Where an institution takes such a decision, the qualifying own funds of that subsidiary may not be included in consolidated own funds.

3. Where the GFSC derogates from the application of prudential requirements on an individual basis under Article 7 or, as applicable, regulation 8 of the IFPR Regulations, own funds instruments within the subsidiaries to which the waiver is applied must not be recognised as own funds at the sub-consolidated or at the consolidated level, as applicable. 

 

Article 88

Qualifying own funds instruments included in consolidated Tier 2 capital

Without prejudice to Article 84(5) or (6), institutions shall determine the amount of qualifying own funds of a subsidiary that is included in consolidated Tier 2 capital by subtracting from the qualifying own funds of that undertaking that are included in consolidated own funds the qualifying Tier 1 capital of that undertaking that is included in consolidated Tier 1 capital.

 

Article 89

Risk weighting and prohibition of qualifying holdings outside the financial sector

1. A qualifying holding, the amount of which exceeds 15 % of the eligible capital of the institution, in an undertaking which is not one of the following shall be subject to the provisions laid down in paragraph 3:

  1. a financial sector entity;
  2. an undertaking, that is not a financial sector entity, carrying on activities which the competent authority considers to be any of the following:
    1. a direct extension of banking;
    2. ancillary to banking;
    3. leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity.

2. The total amount of the qualifying holdings of an institution in undertakings other than those referred to in points (a) and (b) of paragraph 1 that exceeds 60 % of its eligible capital shall be subject to the provisions laid down in paragraph 3.

3. The GFSC shall apply the requirements laid down in point (a) or (b) to qualifying holdings of institutions referred to in paragraphs 1 and 2:

  1. for the purpose of calculating the capital requirement in accordance with Part Three, institutions shall apply a risk weight of 1 250  % to the greater of the following:
    1. the amount of qualifying holdings referred to in paragraph 1 in excess of 15 % of eligible capital;
    2. the total amount of qualifying holdings referred to in paragraph 2 that exceed 60 % of the eligible capital of the institution;
  2. the GFSC shall prohibit institutions from having qualifying holdings referred to in paragraphs 1 and 2 the amount of which exceeds the percentages of eligible capital laid down in those paragraphs.

The GFSC shall publish its choice of (a) or (b).

 

Article 90

Alternative to 1 250  % risk weight

As an alternative to applying a 1 250  % risk weight to the amounts in excess of the limits specified in Article 89(1) and (2), institutions may deduct those amounts from Common Equity Tier 1 items in accordance with point (k) of Article 36(1).

 

Article 91 

Exceptions

1. Shares of undertakings not referred to in points (a) and (b) of Article 89(1) shall not be included in calculating the eligible capital limits specified in that Article where any of the following conditions is met:

  1. those shares are held temporarily during a financial assistance operation as referred to in Article 79;
  2. the holding of those shares is an underwriting position held for five working days or fewer;
  3. those shares are held in the own name of the institution and on behalf of others.

2. Shares which are not participating interests, shares in affiliated undertakings or securities intended for use on a continuing basis in the normal course of an undertaking's activities shall not be included in the calculation specified in Article 89. 

 

Article 92

Own funds requirements

1. Subject to Articles 93 and 94, institutions shall at all times satisfy the following own funds requirements:

  1. a Common Equity Tier 1 capital ratio of 4,5 %;
  2. a Tier 1 capital ratio of 6 %;
  3. a total capital ratio of 8 %.
  4. a leverage ratio of 3%;

1a.  In addition to the requirement in paragraph 1(d), a G-SII shall maintain a leverage ratio buffer equal to the G-SII’s total exposure measure referred to in Article 429(4) multiplied by 50% of the G-SII buffer rate applicable to the G-SII in accordance with regulation 85 of the CICR Regulations.

A G-SII shall meet the leverage ratio buffer requirement with Tier 1 capital only. Tier 1 capital that is used to meet the leverage ratio buffer requirement shall not be used towards meeting any of the leverage based requirements set out in this Regulation and the CICR Regulations, unless either enactment explicitly provides otherwise.

Where a G-SII does not meet the leverage ratio buffer requirement, it shall be subject to the capital conservation requirement in accordance with regulation 94B of the CICR Regulations.

Where a G-SII does not meet at the same time the leverage ratio buffer requirement and the combined buffer requirement as defined in regulation 82 of the CICR Regulations, it shall be subject to the higher of the capital conservation requirements in accordance with regulations 94 and 94B of those Regulations.

2. Institutions shall calculate their capital ratios as follows:

  1. the Common Equity Tier 1 capital ratio is the Common Equity Tier 1 capital of the institution expressed as a percentage of the total risk exposure amount;
  2. the Tier 1 capital ratio is the Tier 1 capital of the institution expressed as a percentage of the total risk exposure amount;
  3. the total capital ratio is the own funds of the institution expressed as a percentage of the total risk exposure amount.

3. Total risk exposure amount shall be calculated as the sum of points (a) to (f) of this paragraph after taking into account the provisions laid down in paragraph 4:

  1. the risk-weighted exposure amounts for credit risk and dilution risk, calculated in accordance with Title II and Article 379, in respect of all the business activities of an institution, excluding risk-weighted exposure amounts from the trading book business of the institution;
  2. the own funds requirements for the trading-book business of an institution for the following: 
    1. market risk as determined in accordance with Title IV of this Part, excluding the approaches set out in Chapters 1a and 1b of that Title;
    2. large exposures exceeding the limits specified in Articles 395 to 401, to the extent that an institution is permitted to exceed those limits, as determined in accordance with Part Four;
  3. the own funds requirements for market risk as determined in Title IV of this Part, excluding the approaches set out in Chapters 1a and 1b of that Title, for all business activities that are subject to foreign exchange risk or commodity risk;

    (ca)   the own funds requirements calculated in accordance with Title V of this Part, with the exception of Article 379 for settlement risk;

  4. the own funds requirements calculated in accordance with Title VI for credit valuation adjustment risk of OTC derivative instruments other than credit derivatives recognised to reduce risk-weighted exposure amounts for credit risk;
  5. the own funds requirements determined in accordance with Title III for operational risk;
  6. the risk-weighted exposure amounts determined in accordance with Title II for counterparty risk arising from the trading book business of the institution for the following types of transactions and agreements:
    1. contracts listed in Annex II and credit derivatives;
    2. repurchase transactions, securities or commodities lending or borrowing transactions based on securities or commodities;
    3. margin lending transactions based on securities or commodities;
    4. long settlement transactions.

4. The following provisions shall apply in the calculation of the total risk exposure amount referred to in paragraph 3:

  1. the own funds requirements referred to in points (c), (d) and (e) of that paragraph shall include those arising from all the business activities of an institution;
  2. institutions shall multiply the own funds requirements set out in points (b) to (e) of that paragraph by 12,5. 

 

Article 92a

Requirements for own funds and eligible liabilities for G-SIIs

1. Subject to Articles 93 and 94 and to the exceptions set out in paragraph 2 of this Article, institutions identified as resolution entities and that are a G-SII or part of a G-SII shall at all times satisfy the following requirements for own funds and eligible liabilities:

  1. a risk-based ratio of 18 %, representing the own funds and eligible liabilities of the institution expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) and (4);
  2. a non-risk-based ratio of 6,75 %, representing the own funds and eligible liabilities of the institution expressed as a percentage of the total exposure measure referred to in Article 429(4).

2. The requirements laid down in paragraph 1 shall not apply in the following cases:

  1. within the three years following the date on which the institution or the group of which the institution is part has been identified as a G-SII;
  2. within the two years following the date on which the resolution authority has applied the bail-in tool in accordance with the Recovery and Resolution Regulations;
  3. within the two years following the date on which the resolution entity has put in place an alternative private sector measure by which capital instruments and other liabilities have been written down or converted into Common Equity Tier 1 items in order to recapitalise the resolution entity without the application of resolution tools.

 

Article 92b

Requirement for own funds and eligible liabilities for third-country G-SIIs

1. Institutions that are material subsidiaries of third-country G-SIIs and that are not resolution entities shall at all times satisfy requirements for own funds and eligible liabilities equal to 90 % of the requirements for own funds and eligible liabilities laid down in Article 92a.

2. For the purpose of complying with paragraph 1, Additional Tier 1, Tier 2 and eligible liabilities instruments shall only be taken into account where those instruments are owned by the ultimate parent undertaking of the third-country G-SII and have been issued directly or indirectly through other entities within the same group, provided that all such entities are established in the same third country as that ultimate parent undertaking or in Gibraltar.

3. An eligible liabilities instrument shall only be taken into account for the purpose of complying with paragraph 1 where it fulfils all the following additional conditions:

  1. in the event of normal insolvency proceedings as defined in regulation 3(1) of the Recovery and Resolution Regulations, the claim resulting from the liability ranks below claims resulting from liabilities that do not fulfil the conditions set out in paragraph 2 of this Article and that do not qualify as own funds;
  2. it is subject to the write-down or conversion powers under regulations 59 to 62 of those Regulations. 

 

Article 93

Initial capital requirement on going concern

1. The own funds of an institution may not fall below the amount of initial capital required at the time of its authorisation.

2. Credit institutions that were already in existence on 1 January 1993 , the amount of own funds of which do not attain the amount of initial capital required may continue to carry out their activities. In that event, the amount of own funds of those institutions may not fall below the highest level reached with effect from 22 December 1989 .

3. Omitted

4. Where control of an institution to which paragraph 2 applies is taken by an individual or legal person other than the person who controlled the institution previously, the amount of own funds of that institution must attain the amount of initial capital required. 

5. Where there is a merger of two or more institutions to which paragraph 2 applies, the amount of own funds of the institution resulting from the merger must not fall below the total own funds of the merged institutions at the time of the merger, as long as the amount of initial capital required has not been attained. 

6. If the GFSC considers that it is necessary for an institution to comply with paragraph 1 in order to guarantee its solvency, the provisions of paragraphs 2, 4 and 5 do not apply. 

 

Article 94

Derogation for small trading book business 

1. By way of derogation from Article 92.3(b), institutions may calculate the own funds requirement for their trading-book business in accordance with paragraph 2, where the size of the institutions’ on- and off-balance-sheet trading-book business is equal to or less than both of the following thresholds on the basis of an assessment carried out on a monthly basis using the data as of the last day of the month:

  1. 5% of the institution’s total assets; and
  2. £44 million. 

2. Where both conditions in paragraph 1 are met, institutions may calculate the own funds requirement for their trading-book business as follows:

  1. for the contracts listed in point 1 of Annex II, contracts relating to equities which are referred to in point 3 of that Annex and credit derivatives, institutions may exempt those positions from the own funds requirement in Article 92.3(b); and
  2. for trading book positions other than those in point (a), institutions may replace the own funds requirement in Article 92.3(b) with the requirement calculated in accordance with Article 92.3(a). 

3. Institutions must calculate the size of their on- and off-balance-sheet trading book business on the basis of data as of the last day of each month for the purposes of paragraph 1 in accordance with the following requirements:

  1. all the positions assigned to the trading book in accordance with Article 104 must be included in the calculation except for the following:
    1. positions concerning foreign exchange and commodities; and
    2. positions in credit derivatives that are recognised as internal hedges against non-trading book credit risk exposures or counterparty risk exposures and the credit derivate transactions that perfectly offset the market risk of those internal hedges as referred to in Article 106(3);
  2. all positions included in the calculation in accordance with point (a) must be valued at their market value on that given date; where the market value of a position is not available on a given date, institutions must take a fair value for the position on that date; where the market value and fair value of a position are not available on a given date, institutions must take the most recent of the market value or fair value for that position; and
  3. the absolute value of long positions must be summed with the absolute value of short positions.

4.  Where both conditions in paragraph 1 are met, irrespective of the obligations set out in regulations 31 and 40 of the CICR Regulations, Article 102(3) and (4), 103 and 104b of this Regulation shall not apply.

5.  Institutions must notify the GFSC when they calculate, or cease to calculate, the own funds requirements of their trading-book business in accordance with paragraph 2.

6.  An institution that no longer meets one or more of the conditions in paragraph 1 must immediately notify the GFSC of that fact.

7.  An institution must cease to calculate the own funds requirements of its trading-book business in accordance with paragraph 2 within three months of one of the following occurring:

  1. the institution does not meet the conditions set out in paragraph 1(a) or (b) for three consecutive months; or
  2. the institution does not meet the conditions set out in paragraph 1(a) or (b) during more than 6 out of the last 12 months.

8.  Where an institution has ceased to calculate the own funds requirements of its trading-book business in accordance with this Article, it may only be permitted to calculate the own funds requirements of its trading-book business in accordance with this Article where it demonstrates to the GFSC that all the conditions in paragraph 1 have been met for an uninterrupted full-year period.

9.  Institutions must not enter into, buy or sell a trading-book position for the sole purpose of complying with any of the conditions set out in paragraph 1 during the monthly assessment.

 

Article 95

Own funds requirements for investment firms with limited authorisation to provide investment services

1. For the purposes of Article 92(3), investment firms that are not authorised to provide the investment services and activities listed in paragraphs 50 and 53 of Schedule 2 to the Act shall use the calculation of the total risk exposure amount specified in paragraph 2.

2. Investment firms referred to in paragraph 1 of this Article and firms referred to in point (2)(c) of Article 4(1) that provide the investment services and activities listed in paragraphs 49 and 51 of Schedule 2 to the Act shall calculate the total risk exposure amount as the higher of the following:

  1. the sum of the items referred to in points (a) to (d) and (f) of Article 92(3) after applying Article 92(4);
  2. 12,5 multiplied by the amount specified in Article 97.

Firms referred to in point (2)(c) of Article 4(1) that provide the investment services and activities listed in paragraphs 49 and 51 of Schedule 2 to the Act shall meet the requirements in Article 92(1) and (2) based on the total risk exposure amount referred to in the first subparagraph.

The GFSC may set the own funds requirements for firms referred to in point (2)(c) of Article 4(1) that provide the investment services and activities listed in points (2) and (4) of Section A of Annex I to Directive 2004/39/EC as the own funds requirements that would apply to those firms under the law of Gibraltar which transposed Directives 2006/49/EC and 2006/48/EC, as it had effect on 31 December 2013.

3. Investment firms referred to in paragraph 1 are subject to all other provisions regarding operational risk in regulations 33 to 44 of the CICR Regulations. 

4.  This Article ceases to have effect from 31st December 2026.

 

Article 96

Own funds requirements for Regulation 19(2) investment firms

1. For the purposes of Article 92(3), the following categories of investment firm which hold initial capital in accordance with regulation 19(2) of the CICR Regulations shall use the calculation of the total risk exposure amount specified in paragraph 2 of this Article:

  1. investment firms that deal on own account only for the purpose of fulfilling or executing a client order or for the purpose of gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order;
  2. investment firms that meet all the following conditions:
    1. they do not hold client money or securities;
    2. they undertake only dealing on own account;
    3. they have no external customers;
    4. their execution and settlement transactions take place under the responsibility of a clearing institution and are guaranteed by that clearing institution.

2. For investment firms referred to in paragraph 1, total risk exposure amount shall be calculated as the sum of the following:

  1. points (a) to (d) and (f) of Article 92(3) after applying Article 92(4);
  2. the amount referred to in Article 97 multiplied by 12,5.

3. Investment firms referred to in paragraph 1 are subject to all other provisions regarding operational risk in regulations 33 to 44 of the CICR Regulations. 

4.  This Article ceases to have effect from 31st December 2026.

 

Article 97

Own Funds based on Fixed Overheads

1. In accordance with Articles 95 and 96, an investment firm and firms referred to in point (2)(c) of Article 4(1) that provide the investment services and activities listed in paragraphs 49 and 51 of Schedule 2 to the Act shall hold eligible capital of at least one quarter of the fixed overheads of the preceding year.

2. Where there is a change in the business of an investment firm since the preceding year that the competent authority considers to be material, the competent authority may adjust the requirement laid down in paragraph 1.

3. Where an investment firm has not completed business for one year, starting from the day it starts up, an investment firm shall hold eligible capital of at least one quarter of the fixed overheads projected in its business plan, except where the competent authority requires the business plan to be adjusted.

4. The Minister may make technical standards further specifying:

  1. the calculation of the requirement to hold eligible capital of at least one quarter of the fixed overheads of the previous year;
  2. the conditions for the adjustment by the competent authority of the requirement to hold eligible capital of at least one quarter of the fixed overheads of the previous year;
  3. the calculation of projected fixed overheads in the case of an investment firm that has not completed business for one year.

5.  This Article ceases to have effect from 31st December 2026.

 

Article 98

Own funds for investment firms on a consolidated basis

1. In the case of the investment firms referred to in Article 95(1) in a group, where that group does not include credit institutions, a Gibraltar parent investment firm shall apply Article 92 at a consolidated level as follows:

  1. using the calculation of total risk exposure amount specified in Article 95(2);
  2. own funds calculated on the basis of the consolidated situation of the parent investment firm or that of the financial holding company or mixed financial holding company, as applicable.

2. In the case of investment firms referred to in Article 96(1) in a group, where that group does not include credit institutions, a Gibraltar parent investment firm and an investment firm controlled by a financial holding company or mixed financial holding company shall apply Article 92 on a consolidated basis as follows:

  1. it shall use the calculation of total risk exposure amount specified in Article 96(2);
  2. it shall use own funds calculated on the basis of the consolidated situation of the parent investment firm or that of the financial holding company or mixed financial holding company, as applicable, and in compliance with Chapter 2 of Title II of Part One. 

3.  In this Article “Gibraltar parent investment firm” means an investment firm in Gibraltar which has an institution or financial institution as a subsidiary or which holds a participation in such an institution or financial institution, and which is not itself a subsidiary of another institution authorised in Gibraltar, or of a financial holding company or mixed financial holding company set up in Gibraltar. 

4.  This Article ceases to have effect from 31srt December 2026.

 

Article 99

Omitted 

 

Article 100 

Omitted

 

Article 101

Omitted

 

Article 102 

Requirements for the trading book

1. Positions in the trading book shall be either free of restrictions on their tradability or able to be hedged.

2. Trading intent shall be evidenced on the basis of the strategies, policies and procedures set up by the institution to manage the position or portfolio in accordance with Articles 103, 104 and 104a.

3.  Institutions shall establish and maintain systems and controls to manage their trading book in accordance with Article 103.

4.  For the purposes of the reporting requirements set out in Article 430b(3), trading book positions shall be assigned to trading desks established in accordance with Article 104b.

5.  Positions in the trading book shall be subject to the requirements for prudent valuation specified in Article 105.

6.  Institutions shall treat internal hedges in accordance with Article 106.

 

Article 103

Management of the trading book 

Institutions shall have in place clearly defined policies and procedures for the overall management of the trading book. Those policies and procedures shall at least address:

  1. the activities which the institution considers to be trading business and as constituting part of the trading book for own funds requirement purposes;
  2. the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;
  3. for positions that are marked-to-model, the extent to which the institution can:
    1. identify all material risks of the position;
    2. hedge all material risks of the position with instruments for which an active, liquid two-way market exists;
    3. derive reliable estimates for the key assumptions and parameters used in the model;
  4. the extent to which the institution can, and is required to, generate valuations for the position that can be validated externally in a consistent manner;
  5. the extent to which legal restrictions or other operational requirements would impede the institution’s ability to effect a liquidation or hedge of the position in the short term;
  6. the extent to which the institution can, and is required to, actively manage the risks of positions within its trading operation;
  7. the extent to which the institution may reclassify risk or positions between the non-trading and trading books and the requirements for such reclassifications as referred to in Article 104a.

2.  In managing its positions or portfolios of positions in the trading book, the institution shall comply with all the following requirements:

  1. the institution shall have in place a clearly documented trading strategy for the position or portfolios in the trading book, which shall be approved by senior management and include the expected holding period;
  2. the institution shall have in place clearly defined policies and procedures for the active management of positions or portfolios in the trading book; those policies and procedures shall include the following:
    1. which positions or portfolios of positions may be entered into by each trading desk or, as the case may be, by designated dealers;
    2. the setting of position limits and monitoring them for appropriateness;
    3. ensuring that dealers have the autonomy to enter into and manage the position within agreed limits and according to the approved strategy;
    4. ensuring that positions are reported to senior management as an integral part of the institution’s risk management process;
    5. ensuring that positions are actively monitored with reference to market information sources and an assessment is made of the marketability or hedgeability of the position or its component risks, including the assessment, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market;
    6. active anti-fraud procedures and controls;
  3. the institution shall have in place clearly defined policies and procedures to monitor the positions against the institution’s trading strategy, including the monitoring of turnover and positions for which the originally intended holding period has been exceeded.

 

Article 104 

Inclusion in the trading book

1. Institutions shall have in place clearly defined policies and procedures for determining which position to include in the trading book for the purposes of calculating their capital requirements, in accordance with the requirements set out in Article 102 and the definition of trading book in accordance with point (86) of Article 4(1), taking into account the institution's risk management capabilities and practices. The institution shall fully document its compliance with these policies and procedures and shall subject them to periodic internal audit.

2. Omitted

 

Article 104b

Requirements for trading desk

1. For the purposes of the reporting requirements set out in Article 430b(3), institutions shall establish trading desks and shall assign each of their trading book positions to one of those trading desks. Trading book positions shall be attributed to the same trading desk only where they satisfy the agreed business strategy for the trading desk and are consistently managed and monitored in accordance with paragraph 2 of this Article.

2. Institutions' trading desks shall at all times meet all the following requirements:

  1. each trading desk shall have a clear and distinctive business strategy and a risk management structure that is adequate for its business strategy;
  2. each trading desk shall have a clear organisational structure; positions in a given trading desk shall be managed by designated dealers within the institution; each dealer shall have dedicated functions in the trading desk; each dealer shall be assigned to one trading desk only;
  3. position limits shall be set within each trading desk according to the business strategy of that trading desk;
  4. reports on the activities, profitability, risk management and regulatory requirements at the trading desk level shall be produced at least on a weekly basis and communicated to the management body on a regular basis;
  5. each trading desk shall have a clear annual business plan including a well-defined remuneration policy on the basis of sound criteria used for performance measurement;
  6. reports on maturing positions, intra-day trading limit breaches, daily trading limit breaches and actions taken by the institution to address those breaches, as well as assessments of market liquidity, shall be prepared for each trading desk on a monthly basis and made available to the GFSC.

3. By way of derogation from point (b) of paragraph 2, an institution may assign a dealer to more than one trading desk, provided that the institution demonstrates to the satisfaction of the GFSC that the assignment has been made due to business or resource considerations and the assignment preserves the other qualitative requirements set out in this Article applicable to dealers and trading desks.

4. Institutions shall notify the GFSC of the manner in which they comply with paragraph 2. The GFSC may require an institution to change the structure or organisation of its trading desks to comply with this Article. 

 

Article 105

Requirements for prudent valuation

1. All trading book positions and non-trading book positions measured at fair value shall be subject to the standards for prudent valuation specified in this Article. Institutions shall in particular ensure that the prudent valuation of their trading book positions achieves an appropriate degree of certainty having regard to the dynamic nature of trading book positions and non-trading book positions measured at fair value, the demands of prudential soundness and the mode of operation and purpose of capital requirements in respect of trading book positions and non-trading book positions measured at fair value. 

2. Institutions shall establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates. Those systems and controls shall include at least the following elements:

  1. documented policies and procedures for the process of valuation, including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, guidelines for the use of unobservable inputs reflecting the institution's assumptions of what market participants would use in pricing the position, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures;
  2. reporting lines for the department accountable for the valuation process that are clear and independent of the front office, which shall ultimately be to the management body.

3. Institutions shall revalue trading book positions at fair value at least on a daily basis. Changes in the value of those positions shall be reported in the profit and loss account of the institution. 

4. Institutions shall mark their trading book positions and non-trading book positions measured at fair value to market whenever possible, including when applying the relevant capital treatment to those positions. 

5. When marking to market, an institution shall use the more prudent side of bid and offer unless the institution can close out at mid market. Where institutions make use of this derogation, they shall every six months inform the GFSC of the positions concerned and furnish evidence that they can close out at mid-market.

6. Where marking to market is not possible, institutions shall conservatively mark to model their positions and portfolios, including when calculating own funds requirements for positions in the trading book and positions measured at fair value in the non-trading book. 

7. Institutions shall comply with the following requirements when marking to model:

  1. senior management shall be aware of the elements of the trading book or of other fair-valued positions which are subject to mark to model and shall understand the materiality of the uncertainty thereby created in the reporting of the risk/performance of the business;
  2. institutions shall source market inputs, where possible, in line with market prices, and shall assess the appropriateness of the market inputs of the particular position being valued and the parameters of the model on a frequent basis;
  3. where available, institutions shall use valuation methodologies which are accepted market practice for particular financial instruments or commodities;
  4. where the model is developed by the institution itself, it shall be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process;
  5. institutions shall have in place formal change control procedures and shall hold a secure copy of the model and use it periodically to check valuations;
  6. risk management shall be aware of the weaknesses of the models used and how best to reflect those in the valuation output; and
  7. institutions' models shall be subject to periodic review to determine the accuracy of their performance, which shall include assessing the continued appropriateness of assumptions, analysis of profit and loss versus risk factors, and comparison of actual close out values to model outputs.

For the purposes of point (d) of the first subparagraph, the model shall be developed or approved independently of the trading desks and shall be independently tested, including validation of the mathematics, assumptions and software implementation.

8. Institutions shall perform independent price verification in addition to daily marking to market or marking to model. Verification of market prices and model inputs shall be performed by a person or unit independent from persons or units that benefit from the trading book, at least monthly, or more frequently depending on the nature of the market or trading activity. Where independent pricing sources are not available or pricing sources are more subjective, prudent measures such as valuation adjustments may be appropriate.

9. Institutions shall establish and maintain procedures for considering valuation adjustments.

10. Institutions shall formally consider the following valuation adjustments: unearned credit spreads, close-out costs, operational risks, market price uncertainty, early termination, investing and funding costs, future administrative costs and, where relevant, model risk.

11. Institutions shall establish and maintain procedures for calculating an adjustment to the current valuation of any less liquid positions, which can in particular arise from market events or institution-related situations such as concentrated positions and/or positions for which the originally intended holding period has been exceeded. Institutions shall, where necessary, make such adjustments in addition to any changes to the value of the position required for financial reporting purposes and shall design such adjustments to reflect the illiquidity of the position. Under those procedures, institutions shall consider several factors when determining whether a valuation adjustment is necessary for less liquid positions. Those factors include the following:

  1. the additional amount of time it would take to hedge out the position or the risks within the position beyond the liquidity horizons that have been assigned to the risk factors of the position in accordance with Article 325bd;
  2. the volatility and average of bid/offer spreads;
  3. the availability of market quotes (number and identity of market makers) and the volatility and average of trading volumes including trading volumes during periods of market stress;
  4. market concentrations;
  5. the ageing of positions;
  6. the extent to which valuation relies on marking-to-model;
  7. the impact of other model risks.

12. When using third party valuations or marking to model, institutions shall consider whether to apply a valuation adjustment. In addition, institutions shall consider the need to establish adjustments for less liquid positions and on an ongoing basis review their continued suitability. Institutions shall also explicitly assess the need for valuation adjustments relating to the uncertainty of parameter inputs used by models.

13. With regard to complex products, including securitisation exposures and n-th-to-default credit derivatives, institutions shall explicitly assess the need for valuation adjustments to reflect the model risk associated with using a possibly incorrect valuation methodology and the model risk associated with using unobservable (and possibly incorrect) calibration parameters in the valuation model.

14. The Minister may make technical standards specifying the conditions according to which the requirements of Article 105 shall be applied for the purposes of paragraph 1 of this Article.

 

Article 106

Internal Hedges

1. An internal hedge shall in particular meet the following requirements:

  1. it shall not be primarily intended to avoid or reduce own funds requirements;
  2. it shall be properly documented and subject to particular internal approval and audit procedures;
  3. it shall be dealt with at market conditions;
  4. the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised limits;
  5. it shall be carefully monitored in accordance with adequate procedures.

2. The requirements of paragraph 1 apply without prejudice to the requirements applicable to the hedged position in the non-trading book.

3. By way of derogation from paragraphs 1 and 2, when an institution hedges a non-trading book credit risk exposure or counterparty risk exposure using a credit derivative booked in its trading book using an internal hedge, the non-trading book exposure or counterparty risk exposure shall not be deemed to be hedged for the purposes of calculating risk-weighted exposure amounts unless the institution purchases from an eligible third party protection provider a corresponding credit derivative meeting the requirements for unfunded credit protection in the non-trading book. Without prejudice to point (h) of Article 299(2), where such third party protection is purchased and recognised as a hedge of a non-trading book exposure for the purposes of calculating capital requirements, neither the internal nor external credit derivative hedge shall be included in the trading book for the purposes of calculating capital requirements. 

 

Article 107

Approaches to credit risk

1. Institutions shall apply either the Standardised Approach provided for in Chapter 2 or, if permitted by the GFSC in accordance with Article 143, the Internal Ratings Based Approach provided for in Chapter 3 to calculate their risk-weighted exposure amounts for the purposes of points (a) and (f) of Article 92(3).

2. For trade exposures and for default fund contributions to a central counterparty, institutions shall apply the treatment set out in Chapter 6, Section 9 to calculate their risk-weighted exposure amounts for the purposes of points (a) and (f) of Article 92(3). For all other types of exposures to a central counterparty, institutions shall treat those exposures as follows:

  1. as exposures to an institution for other types of exposures to a qualifying CCP;
  2. as exposures to a corporate for other types of exposures to a non-qualifying CCP.

3. For the purposes of this Regulation, exposures to a third-country investment firm, a third-country credit institution and a third-country exchange shall be treated as exposures to an institution only where the third country applies prudential and supervisory requirements to that entity that are at least equivalent to those applied in Gibraltar. 

4. For the purposes of paragraph 3, the Minister may by regulations make a determination that a third country applies prudential supervisory and regulatory requirements at least equivalent to those applied in Gibraltar. 

 

Article 108

Use of credit risk mitigation technique under the Standardised Approach and the IRB Approach

1. For an exposure to which an institution applies the Standardised Approach under Chapter 2 or applies the IRB Approach under Chapter 3 but without using its own estimates of loss given default (LGD) and conversion factors under Article 151, the institution may use credit risk mitigation in accordance with Chapter 4 in the calculation of risk-weighted exposure amounts for the purposes of points (a) and (f) of Article 92(3) or, as relevant, expected loss amounts for the purposes of the calculation referred to in point (d) of Article 36(1) and point (c) of Article 62.

2. For an exposure to which an institution applies the IRB Approach by using their own estimates of LGD and conversion factors under Article 151, the institution may use credit risk mitigation in accordance with Chapter 3.

 

Article 109

Treatment of securitisation positions

Institutions shall calculate the risk-weighted exposure amount for a position they hold in a securitisation in accordance with Chapter 5.

 

Article 110

Treatment of credit risk adjustment

1. Institutions applying the Standardised Approach shall treat general credit risk adjustments in accordance with Article 62(c).

2. Institutions applying the IRB Approach shall treat general credit risk adjustments in accordance with Article 159, Article 62(d) and Article 36(1)(d).

For the purposes of this Article and Chapters 2 and 3, general and specific credit risk adjustments shall exclude funds for general banking risk.

3. Institutions using the IRB Approach that apply the Standardised Approach for a part of their exposures on consolidated or individual basis, in accordance with Articles 148 and 150 shall determine the part of general credit risk adjustment that shall be assigned to the treatment of general credit risk adjustment under the Standardised Approach and to the treatment of general credit risk adjustment under the IRB Approach as follows:

  1. where applicable, when an institution included in the consolidation exclusively applies the IRB Approach, general credit risk adjustments of this institution shall be assigned to the treatment set out in paragraph 2;
  2. where applicable, when an institution included in the consolidation exclusively applies the Standardised Approach, general credit risk adjustment of this institution shall be assigned to the treatment set out in paragraph 1;
  3. the remainder of credit risk adjustment shall be assigned on a pro rata basis according to the proportion of risk weighted exposure amounts subject to the Standardised Approach and subject to the IRB Approach.

4. The Minister may make technical standards specifying the calculation of specific credit risk adjustments and general credit risk adjustments under the applicable accounting framework for the following:

  1. exposure value under the Standardised Approach referred to in Article 111;
  2. exposure value under the IRB Approach referred to in Articles 166 to 168;
  3. treatment of expected loss amounts referred to in Article 159;
  4. exposure value for the calculation of the risk-weighted exposure amounts for securitisation position referred to in Articles 246 and 266;
  5. the determination of default under Article 178.

 

Article 111

Exposure value

1. The exposure value of an asset item shall be its accounting value remaining after specific credit risk adjustments in accordance with Article 110, additional value adjustments in accordance with Articles 34 and 105, amounts deducted in accordance with point (m) Article 36(1) and other own funds reductions related to the asset item have been applied. The exposure value of an off-balance sheet item listed in Annex I shall be the following percentage of its nominal value after reduction of specific credit risk adjustments and amounts deducted in accordance with point (m) Article 36(1): 

  1. 100 % if it is a full-risk item;
  2. 50 % if it is a medium-risk item;
  3. 20 % if it is a medium/low-risk item;
  4. 0 % if it is a low-risk item.

The off-balance sheet items referred to in the second sentence of the first subparagraph shall be assigned to risk categories as indicated in Annex I.

When an institution is using the Financial Collateral Comprehensive Method under Article 223, the exposure value of securities or commodities sold, posted or lent under a repurchase transaction or under a securities or commodities lending or borrowing transaction, and margin lending transactions shall be increased by the volatility adjustment appropriate to such securities or commodities as prescribed in Articles 223 to 225.

2. The exposure value of a derivative instrument listed in Annex II shall be determined in accordance with Chapter 6 with the effects of contracts of novation and other netting agreements taken into account for the purposes of those methods in accordance with Chapter 6. The exposure value of repurchase transaction, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions may be determined either in accordance with Chapter 6 or Chapter 4.

3. Where an exposure is subject to funded credit protection, the exposure value applicable to that item may be amended in accordance with Chapter 4. 

 

Article 112

Exposure classes

Each exposure shall be assigned to one of the following exposure classes:

  1. exposures to central governments or central banks;
  2. exposures to regional governments or local authorities;
  3. exposures to public sector entities;
  4. exposures to multilateral development banks;
  5. exposures to international organisations;
  6. exposures to institutions;
  7. exposures to corporates;
  8. retail exposures;
  9. exposures secured by mortgages on immovable property;
  10. exposures in default;
  11. exposures associated with particularly high risk;
  12. exposures in the form of covered bonds;
  13. items representing securitisation positions;
  14. exposures to institutions and corporates with a short-term credit assessment;
  15. exposures in the form of units or shares in collective investment undertakings ( CIUs );
  16. equity exposures;
  17. other items.

 

Article 113

Calculation of risk-weighted exposure amounts

1. To calculate risk-weighted exposure amounts, risk weights shall be applied to all exposures, unless deducted from own funds, in accordance with the provisions of Section 2. The application of risk weights shall be based on the exposure class to which the exposure is assigned and, to the extent specified in Section 2, its credit quality. Credit quality may be determined by reference to the credit assessments of ECAIs or the credit assessments of export credit agencies in accordance with Section 3.

2. For the purposes of applying a risk weight, as referred to in paragraph 1, the exposure value shall be multiplied by the risk weight specified or determined in accordance with Section 2.

3. Where an exposure is subject to credit protection the risk weight applicable to that item may be amended in accordance with Chapter 4.

4. Risk-weighted exposure amounts for securitised exposures shall be calculated in accordance with Chapter 5.

5. Exposures for which no calculation is provided in Section 2 shall be assigned a risk-weight of 100 %.

6. With the exception of exposures giving rise to Common Equity Tier 1, Additional Tier 1 or Tier 2 items, an institution may, subject to the prior approval of the GFSC, decide not to apply the requirements of paragraph 1 of this Article to the exposures of that institution to a counterparty which is its parent undertaking, its subsidiary, a subsidiary of its parent undertaking or an undertaking linked by a common management relationship. The GFSC is empowered to grant approval if the following conditions are fulfilled:

  1. the counterparty is an institution, a financial institution or an ancillary services undertaking subject to appropriate prudential requirements;
  2. the counterparty is included in the same consolidation as the institution on a full basis;
  3. the counterparty is subject to the same risk evaluation, measurement and control procedures as the institution;
  4. the counterparty is established in the Gibraltar;
  5. there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities from the counterparty to the institution.

Where the institution, in accordance with this paragraph, is authorised not to apply the requirements of paragraph 1, it may assign a risk weight of 0 %.

 

Article 114

Exposures to central governments or central banks

1. Exposures to central governments and central banks shall be assigned a 100 % risk weight, unless the treatments set out in paragraphs 2 to 7 apply.

2. Exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 1 which corresponds to the credit assessment of the ECAI in accordance with Article 136.

Table 1

Credit quality step 1 2 3 4 5 6
Risk weight 0 % 20 % 50 % 100 % 100 % 150 %

3. Exposures to the ECB shall be assigned a 0 % risk weight.

4. Exposures to the government of Gibraltar, the central government of the United Kingdom and the Bank of England denominated and funded in sterling shall be assigned a risk weight of 0 %.

6.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7. When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in Gibraltar assign a risk weight which is lower than that indicated in paragraphs 1 and 2 to exposures to their central government and central bank denominated and funded in the domestic currency, institutions may risk weight such exposures in the same manner.

For the purposes of this paragraph, the Minister may by regulations make a determination that a third country applies supervisory and regulatory arrangements at least equivalent to those applied in Gibraltar.

 

Article 115

Exposures to regional governments or local authorities

1. Exposures to regional governments or local authorities shall be risk-weighted as exposures to institutions unless they are treated as exposures to central governments under paragraphs 2 or 4 or receive a risk weight as specified in paragraph 5. The preferential treatment for short-term exposures specified in Article 119(2) and Article 120(2) shall not be applied.

2. Exposures to regional governments or local authorities shall be treated as exposures to the central government in whose jurisdiction they are established where there is no difference in risk between such exposures because of the specific revenue-raising powers of the former, and the existence of specific institutional arrangements the effect of which is to reduce their risk of default.

3. Exposures to churches or religious communities constituted in the form of a legal person under public law shall, in so far as they raise taxes in accordance with legislation conferring on them the right to do so, be treated as exposures to regional governments and local authorities. In this case, paragraph 2 shall not apply and, for the purposes of Article 150(1)(a), permission to apply the Standardised Approach shall not be excluded.

4. When competent authorities of a third country jurisdiction which applies supervisory and regulatory arrangements at least equivalent to those applied in Gibraltar treat exposures to regional governments or local authorities as exposures to their central government and there is no difference in risk between such exposures because of the specific revenue-raising powers of regional government or local authorities and to specific institutional arrangements to reduce the risk of default, institutions may risk weight exposures to such regional governments and local authorities in the same manner.

For the purposes of this paragraph, the Minister may by regulations make a determination that a third country applies supervisory and regulatory arrangements at least equivalent to those applied in Gibraltar.  

 

Article 116

Exposures to public sector entities

1. Exposures to public sector entities for which a credit assessment by a nominated ECAI is not available shall be assigned a risk weight in accordance with the credit quality step to which exposures to the central government of the jurisdiction in which the public sector entity is incorporated are assigned in accordance with the following Table 2:

Table 2

Credit quality step to which central government is assigned 1 2 3 4 5 6
Risk weight 20 % 50 % 100 % 100 % 100 % 150 %

For exposures to public sector entities incorporated in countries where the central government is unrated, the risk weight shall be 100 %.

2. Exposures to public sector entities for which a credit assessment by a nominated ECAI is available shall be treated in accordance with Article 120. The preferential treatment for short-term exposures specified in Articles 119(2) and 120(2), shall not be applied to those entities.

3. For exposures to public sector entities with an original maturity of three months or less, the risk weight shall be 20 %.

4. In exceptional circumstances, exposures to public-sector entities may be treated as exposures to the central government, regional government or local authority in whose jurisdiction they are established where in the opinion of the GFSC there is no difference in risk between such exposures because of the existence of an appropriate guarantee by the central government, regional government or local authority.

5. When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent to those applied in Gibraltar, treat exposures to public sector entities in accordance with paragraph 1 or 2, institutions may risk weight exposures to such public sector entities in the same manner. Otherwise the institutions shall apply a risk weight of 100 %.

For the purposes of this paragraph, the Minister may by regulations make a determination that a third country applies supervisory and regulatory arrangements at least equivalent to those applied in Gibraltar.

 

Article 117

Exposures to multilateral development banks

1. Exposures to multilateral development banks that are not referred to in paragraph 2 shall be treated in the same manner as exposures to institutions. The preferential treatment for short-term exposures as specified in Articles 119(2), 120(2) and 121(3) shall not be applied.

The Inter-American Investment Corporation, the Black Sea Trade and Development Bank, the Central American Bank for Economic Integration and the CAF-Development Bank of Latin America shall be considered multilateral development banks.

2. Exposures to the following multilateral development banks shall be assigned a 0 % risk weight:

  1. the International Bank for Reconstruction and Development;
  2. the International Finance Corporation;
  3. the Inter-American Development Bank;
  4. the Asian Development Bank;
  5. the African Development Bank;
  6. the Council of Europe Development Bank;
  7. the Nordic Investment Bank;
  8. the Caribbean Development Bank;
  9. the European Bank for Reconstruction and Development;
  10. the European Investment Bank;
  11. the European Investment Fund;
  12. the Multilateral Investment Guarantee Agency;
  13. the International Finance Facility for Immunisation;
  14. the Islamic Development Bank
  15. the International Development Association;
  16. (p) the Asian Infrastructure Investment Bank. 

The Minister may by regulations, in accordance with international standards, amend the list of multilateral development banks referred to in the first subparagraph. 

 

Article 118

Exposures to international organisations

Exposures to the following international organisations shall be assigned a 0 % risk weight:

  1. the European Union;
  2. the International Monetary Fund;
  3. the Bank for International Settlements;
  4. the European Financial Stability Facility;
  5. the European Stability Mechanism;

 

Article 119

Exposures to institutions

1. Exposures to institutions for which a credit assessment by a nominated ECAI is available shall be risk-weighted in accordance with Article 120. Exposures to institutions for which a credit assessment by a nominated ECAI is not available shall be risk-weighted in accordance with Article 121.

2. Exposures to institutions of a residual maturity of three months or less denominated and funded in the national currency of the borrower shall be assigned a risk weight that is one category less favourable than the preferential risk weight, as described in Article 114(4) to (7), assigned to exposures to the central government in which the institution is incorporated.

3. No exposures with a residual maturity of three months or less denominated and funded in the national currency of the borrower shall be assigned a risk weight less than 20 %.

4. Omitted

5. Exposures to financial institutions authorised and supervised by the GFSC and subject to prudential requirements comparable to those applied to institutions in terms of robustness shall be treated as exposures to institutions. 

6.  For the purposes of paragraph 5, the prudential requirements set out in the IFPR Regulations must be considered to be comparable to those applied to institutions in terms of robustness.

 

Article 120

Exposures to rated institutions

1. Exposures to institutions with a residual maturity of more than three months for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 3 which corresponds to the credit assessment of the ECAI in accordance with Article 136.

Table 3

Credit quality step 1 2 3 4 5 6
Risk weight 20 % 50 % 50 % 100 % 100 % 150 %

2. Exposures to an institution of up to three months residual maturity for which a credit assessment by a nominated ECAI is available shall be assigned a risk-weight in accordance with Table 4 which corresponds to the credit assessment of the ECAI in accordance with Article 136:

Table 4

Credit quality step 1 2 3 4 5 6
Risk weight 20 % 20 % 20 % 50 % 50 % 150 %

3. The interaction between the treatment of short term credit assessment under Article 131 and the general preferential treatment for short term exposures set out in paragraph 2 shall be as follows:

  1. If there is no short-term exposure assessment, the general preferential treatment for short-term exposures as specified in paragraph 2 shall apply to all exposures to institutions of up to three months residual maturity;
  2. If there is a short-term assessment and such an assessment determines the application of a more favourable or identical risk weight than the use of the general preferential treatment for short-term exposures, as specified in paragraph 2, then the short-term assessment shall be used for that specific exposure only. Other short-term exposures shall follow the general preferential treatment for short-term exposures, as specified in paragraph 2;
  3. If there is a short-term assessment and such an assessment determines a less favourable risk weight than the use of the general preferential treatment for short-term exposures, as specified in paragraph 2, then the general preferential treatment for short-term exposures shall not be used and all unrated short-term claims shall be assigned the same risk weight as that applied by the specific short-term assessment. 

 

Article 121

Exposures to unrated institutions

1. Exposures to institutions for which a credit assessment by a nominated ECAI is not available shall be assigned a risk weight in accordance with the credit quality step to which exposures to the central government of the jurisdiction in which the institution is incorporated are assigned in accordance with Table 5.

Table 5

Credit quality step to which central government is assigned 1 2 3 4 5 6
Risk weight of exposure 20 % 50 % 100 % 100 % 100 % 150 %

2. For exposures to unrated institutions incorporated in countries where the central government is unrated, the risk weight shall be 100 %.

3. For exposures to unrated institutions with an original effective maturity of three months or less, the risk weight shall be 20 %.

4. Notwithstanding paragraphs 2 and 3, for trade finance exposures referred to in point (b) of the second subparagraph of Article 162(3) to unrated institutions, the risk weight shall be 50 % and where the residual maturity of these trade finance exposures to unrated institutions is three months or less, the risk weight shall be 20 %. 

 

Article 122

Exposures to corporates 

1. Exposures for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 6 which corresponds to the credit assessment of the ECAI in accordance with Article 136.

Table 6

Credit quality step 1 2 3 4 5 6
Risk weight 20 % 50 % 100 % 100 % 150 % 150 %

2. Exposures for which such a credit assessment is not available shall be assigned a 100 % risk weight or the risk weight of exposures to the central government of the jurisdiction in which the corporate is incorporated, whichever is the higher. 

 

Article 123

Retail exposures

Exposures that comply with the following criteria shall be assigned a risk weight of 75 %:

  1. the exposure shall be either to a natural person or persons, or to a small or medium-sized enterprise (SME);
  2. the exposure shall be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced;
  3. the total amount owed to the institution and parent undertakings and its subsidiaries, including any exposure in default, by the obligor client or group of connected clients, but excluding exposures fully and completely secured on residential property collateral that have been assigned to the exposure class laid down in point (i) of Article 112, shall not, to the knowledge of the institution, exceed EUR 1 million. The institution shall take reasonable steps to acquire this knowledge.

Securities shall not be eligible for the retail exposure class.

Exposures that do not comply with the criteria referred to in points (a) to (c) of the first subparagraph shall not be eligible for the retail exposures class.

The present value of retail minimum lease payments is eligible for the retail exposure class.

Exposures due to loans granted by a credit institution to pensioners or employees with a permanent contract against the unconditional transfer of part of the borrower's pension or salary to that credit institution shall be assigned a risk weight of 35 %, provided that all the following conditions are met:

  1. in order to repay the loan, the borrower unconditionally authorises the pension fund or employer to make direct payments to the credit institution by deducting the monthly payments on the loan from the borrower's monthly pension or salary;
  2. the risks of death, inability to work, unemployment or reduction of the net monthly pension or salary of the borrower are properly covered through an insurance policy underwritten by the borrower to the benefit of the credit institution;
  3. the monthly payments to be made by the borrower on all loans that meet the conditions set out in points (a) and (b) do not in aggregate exceed 20 % of the borrower's net monthly pension or salary;
  4. the maximum original maturity of the loan is equal to or less than ten years.

 

Article 124

Exposures secured by mortgages on immovable property

1. An exposure or any part of an exposure fully secured by mortgage on immovable property shall be assigned a risk weight of 100 %, where the conditions set out in Article 125 or 126 are not met, except for any part of the exposure which is assigned to another exposure class. The part of the exposure that exceeds the mortgage value of the immovable property shall be assigned the risk weight applicable to the unsecured exposures of the counterparty involved.

The part of an exposure treated as fully secured by immovable property shall not be higher than the pledged amount of the market value or, if rigorous criteria are in force at the time in Gibraltar for the assessment of the mortgage lending value, the mortgage lending value of the property in question.

1a. The GFSC must ensure that the Minister is informed of the GFSC’s intention to make use of this Article and is appropriately involved in the assessment of financial stability concerns in Gibraltar in accordance with paragraph 2. 

2. Based on the data collected under Article 430a and on any other relevant indicators, the GFSC shall periodically, and at least annually, assess whether the risk weight of 35 % for exposures to one or more property segments secured by mortgages on residential property referred to in Article 125 located in Gibraltar and the risk weight of 50 % for exposures secured by mortgages on commercial immovable property referred to in Article 126 located in one or more parts of the territory of the Member State of the relevant authority are appropriately based on:

  1. the loss experience of exposures secured by immovable property;
  2. forward-looking immovable property markets developments.

Where, on the basis of the assessment referred to in the first subparagraph of this paragraph, the GFSC concludes that the risk weights set out in Article 125(2) or 126(2) do not adequately reflect the actual risks related to exposures to one or more property segments fully secured by mortgages on residential property or on commercial immovable property located in Gibraltar, and if it considers that the inadequacy of the risk weights could adversely affect current or future financial stability in Gibraltar, it may increase the risk weights applicable to those exposures within the ranges determined in the fourth subparagraph of this paragraph or impose stricter criteria than those set out in Article 125(2) or 126(2).

For the purposes of the second subparagraph of this paragraph, the GFSC may set the risk weights within the following ranges: 

  1. 35 % to 150 % for exposures secured by mortgages on residential property;
  2. 50 % to 150 % for exposures secured by mortgages on commercial immovable property.

3. Where the authority designated in accordance with paragraph 1a sets higher risk weights or stricter criteria pursuant to the second subparagraph of paragraph 2, institutions shall have a six-month transitional period to apply them. 

4. The Minister may make technical standards specifying the rigorous criteria for the assessment of the mortgage lending value referred to in paragraph 1 and the types of factors to be considered for the assessment of the appropriateness of the risk weights referred in the first subparagraph of paragraph 2. 

 

Article 125

Exposures fully and completely secured by mortgages on residential property

1. Unless otherwise decided by the GFSC in accordance with Article 124(2), exposures fully and completely secured by mortgages on residential property shall be treated as follows:

  1. exposures or any part of an exposure fully and completely secured by mortgages on residential property which is or shall be occupied or let by the owner, or the beneficial owner in the case of personal investment companies, shall be assigned a risk weight of 35 %;
  2. exposures to a tenant under a property leasing transaction concerning residential property under which the institution is the lessor and the tenant has an option to purchase, shall be assigned a risk weight of 35 % provided that the exposure of the institution is fully and completely secured by its ownership of the property.

2. Institutions shall consider an exposure or any part of an exposure as fully and completely secured for the purposes of paragraph 1 only if the following conditions are met:

  1. the value of the property shall not materially depend upon the credit quality of the borrower. Institutions may exclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower from their determination of the materiality of such dependence;
  2. the risk of the borrower shall not materially depend upon the performance of the underlying property or project, but on the underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility shall not materially depend on any cash flow generated by the underlying property serving as collateral. For those other sources, institutions shall determine maximum loan-to-income ratios as part of their lending policy and obtain suitable evidence of the relevant income when granting the loan;
  3. the requirements set out in Article 208 and the valuation rules set out in Article 229(1) are met;
  4. unless otherwise determined under Article 124(2), the part of the loan to which the 35 % risk weight is assigned does not exceed 80 % of the market value of the property in question or 80 % of the mortgage lending value of the property in question if rigorous criteria are in force at the time in Gibraltar for the assessment of the mortgage lending value.

3. Institutions may derogate from point (b) of paragraph 2 for exposures fully and completely secured by mortgages on residential property which is situated in Gibraltar, where the GFSC has determined that loss rates do not exceed the following limits: 

  1. losses stemming from lending collateralised by residential property up to 80 % of the market value or 80 % of the mortgage lending value, unless otherwise decided under Article 124(2), do not exceed 0,3 % of the outstanding loans collateralised by residential property in any given year;
  2. overall losses stemming from lending collateralised by residential property do not exceed 0,5 % of the outstanding loans collateralised by residential property in any given year.

4. Where either of the limits referred to in paragraph 3 is not satisfied in a given year, the eligibility to use paragraph 3 shall cease and the condition contained in point (b) of paragraph 2 shall apply until the conditions in paragraph 3 are satisfied in a subsequent year. 

 

Article 126

Exposures fully and completely secured by mortgages on commercial immovable property

1. Unless otherwise decided by the GFSC in accordance with Article 124(2), exposures fully and completely secured by mortgages on commercial immovable property shall be treated as follows:

  1. exposures or any part of an exposure fully and completely secured by mortgages on offices or other commercial premises may be assigned a risk weight of 50 %;
  2. exposures related to property leasing transactions concerning offices or other commercial premises under which the institution is the lessor and the tenant has an option to purchase may be assigned a risk weight of 50 % provided that the exposure of the institution is fully and completely secured by its ownership of the property.

2. Institutions shall consider an exposure or any part of an exposure as fully and completely secured for the purposes of paragraph 1 only if the following conditions are met:

  1. the value of the property shall not materially depend upon the credit quality of the borrower. Institutions may exclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower from their determination of the materiality of such dependence;
  2. the risk of the borrower shall not materially depend upon the performance of the underlying property or project, but on the underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility shall not materially depend on any cash flow generated by the underlying property serving as collateral;
  3. the requirements set out in Article 208 and the valuation rules set out in Article 229(1) are met;
  4. the 50 % risk weight unless otherwise provided under Article 124(2) shall be assigned to the part of the loan that does not exceed 50 % of the market value of the property or 60 % of the mortgage lending value unless otherwise provided under Article 124(2) of the property in question if rigorous criteria are in force at the time in Gibraltar for the assessment of the mortgage lending value.

3. Institutions may derogate from point (b) of paragraph 2 for exposures fully and completely secured by mortgages on commercial immovable  property which is situated in Gibraltar, where the GFSC has determined that loss rates do not exceed the following limits:

  1. losses stemming from lending collateralised by commercial immovable property up to 50 % of the market value or 60 % of the mortgage lending value, unless otherwise determined under Article 124(2), do not exceed 0,3 % of the outstanding loans collateralised by commercial immovable property;
  2. overall losses stemming from lending collateralised by commercial immovable property do not exceed 0,5 % of the outstanding loans collateralised by commercial immovable property.

4. Where either of the limits referred to in paragraph 3 is not satisfied in a given year, the eligibility to use paragraph 3 shall cease and the condition contained in point (b) of paragraph 2 shall apply until the conditions in paragraph 3 are satisfied in a subsequent year. 

 

Article 127

Exposures in default

1. The unsecured part of any item where the obligor has defaulted in accordance with Article 178, or in the case of retail exposures, the unsecured part of any credit facility which has defaulted in accordance with Article 178 shall be assigned a risk weight of:

  1. 150 %, where the sum of specific credit risk adjustments and of the amounts deducted in accordance with point (m) Article 36(1) is less than 20 % of the unsecured part of the exposure value if those specific credit risk adjustments and deductions were not applied;
  2. 100 %, where the sum of the specific credit risk adjustments and of the amounts deducted in accordance with point (m) Article 36(1) is no less than 20 % of the unsecured part of the exposure value if those specific credit risk adjustments and deductions were not applied.

2. For the purpose of determining the secured part of the past due item, eligible collateral and guarantees shall be those eligible for credit risk mitigation purposes under Chapter 4.

3. The exposure value remaining after specific credit risk adjustments of exposures fully and completely secured by mortgages on residential property in accordance with Article 125 shall be assigned a risk weight of 100 % if a default has occurred in accordance with Article 178.

4. The exposure value remaining after specific credit risk adjustments of exposures fully and completely secured by mortgages on commercial immovable property in accordance with Article 126 shall be assigned a risk weight of 100 % if a default has occurred in accordance with Article 178. 

 

Article 128

Items associated with particular high risk

1. Institutions shall assign a 150 % risk weight to exposures that are associated with particularly high risks. 

2. For the purposes of this Article, institutions shall treat any of the following exposures as exposures associated with particularly high risks:

  1. investments in venture capital firms, except where those investments are treated in accordance with Article 132;

  2. investments in private equity, except where those investments are treated in accordance with Article 132;
  3. speculative immovable property financing.

3. When assessing whether an exposure other than exposures referred to in paragraph 2 is associated with particularly high risks, institutions shall take into account the following risk characteristics:

  1. there is a high risk of loss as a result of a default of the obligor;
  2. it is impossible to assess adequately whether the exposure falls under point (a).

 

Article 129

Exposures in the form of covered bonds

1. To be eligible for the preferential treatment set out in paragraphs 4 and 5, CRR covered bonds shall meet the requirements set out in paragraph 7 and shall be collateralised by any of the following eligible assets:

  1. exposures to or guaranteed by the Government;
  2. exposures to or guaranteed by third country central governments, third-country central banks, multilateral development banks, international organisations that qualify for the credit quality step 1 as set out in this Chapter, and exposures to or guaranteed by third-country public sector entities, third-country regional governments or third-country local authorities that are risk weighted as exposures to institutions or central governments and central banks in accordance with Article 115(1) or (2), or Article 116(1), (2) or (4) respectively and that qualify for the credit quality step 1 as set out in this Chapter, and exposures within the meaning of this point that qualify as a minimum for the credit quality step 2 as set out in this Chapter, provided that they do not exceed 20 % of the nominal amount of outstanding covered bonds of the issuing institutions;
  3. exposures to institutions that qualify for the credit quality step 1 as set out in this Chapter. The total exposure of this kind shall not exceed 15 % of the nominal amount of outstanding covered bonds of the issuing institution. Exposures to institutions in Gibraltar with a maturity not exceeding 100 days shall not be comprised by the step 1 requirement but those institutions shall as a minimum qualify for credit quality step 2 as set out in this Chapter;
  4. loans secured by residential property up to the lesser of the principal amount of the liens that are combined with any prior liens and 80% of the value of the pledged properties;
  5. Omitted
  6. loans secured by commercial immovable property up to the lesser of the principal amount of the liens that are combined with any prior liens and 60% of the value of the pledged properties. 

    Loans secured by commercial immovable property are eligible where the loan to value ratio of 60 % is exceeded up to a maximum level of 70 % if the value of the total assets pledged as collateral for the covered bonds exceed the nominal amount outstanding on the covered bond by at least 10 %, and the bondholders' claim meets the legal certainty requirements set out in Chapter 4. The bondholders' claim shall take priority over all other claims on the collateral;

  7. loans secured by maritime liens on ships up to the difference between 60 % of the value of the pledged ship and the value of any prior maritime liens.

For the purposes of point (c) of the first subparagraph, exposures caused by transmission and management of payments of the obligors of, or liquidation proceeds in respect of, loans secured by pledged properties of the senior units or debt securities shall not be comprised in calculating the limits referred to in those points.

The GFSC may partly waive the application of point (c) of the first subparagraph and allow credit quality step 2 for up to 10 % of the total exposure of the nominal amount of outstanding covered bonds of the issuing institution, provided that significant potential concentration problems in Gibraltar can be documented due to the application of the credit quality step 1 requirement referred to in that point.

2. The situations referred to in points (a) to (f) of paragraph 1 shall also include collateral that is exclusively restricted by legislation to the protection of the bond-holders against losses.

3. Institutions shall for immovable property collateralising CRR covered bonds meet the requirements set out in Article 208 and the valuation rules set out in Article 229(1).

4. CRR covered bonds for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 6a which corresponds to the credit assessment of the ECAI in accordance with Article 136.

Table 6a

Credit quality step 1 2 3 4 5 6
Risk weight 10 % 20 % 20 % 50 % 50 % 100 %

5. CRR covered bonds for which a credit assessment by a nominated ECAI is not available shall be assigned a risk weight on the basis of the risk weight assigned to senior unsecured exposures to the institution which issues them. The following correspondence between risk weights shall apply:

  1. if the exposures to the institution are assigned a risk weight of 20 %, the CRR covered bond shall be assigned a risk weight of 10 %;
  2. if the exposures to the institution are assigned a risk weight of 50 %, the CRR covered bond shall be assigned a risk weight of 20 %;
  3. if the exposures to the institution are assigned a risk weight of 100 %, the CRR covered bond shall be assigned a risk weight of 50 %;
  4. if the exposures to the institution are assigned a risk weight of 150 %, the CRR covered bond shall be assigned a risk weight of 100 %.

6. CRR covered bonds issued before 31 December 2007 are not subject to the requirements of paragraphs 1 and 3. They are eligible for the preferential treatment under paragraphs 4 and 5 until their maturity.

7. Exposures in the form of CRR covered bonds are eligible for preferential treatment, provided that the institution investing in the CRR covered bonds can demonstrate to the GFSC that:

  1. it receives portfolio information at least on:
    1. the value of the cover pool and outstanding CRR covered bonds;
    2. the geographical distribution and type of cover assets, loan size, interest rate and currency risks;
    3. the maturity structure of cover assets and CRR covered bonds; and
    4. the percentage of loans more than 90 days past due;
  2. the issuer makes the information referred to in point (a) available to the institution at least semi-annually.

 

Article 130

Items representing securitisation positions

Risk-weighted exposure amounts for securitisation positions shall be determined in accordance with Chapter 5.

 

Article 131

Exposures to institutions and corporates with a short-term credit assessment 

Exposures to institutions and exposures to corporates for which a short-term credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 7 which corresponds to the credit assessment of the ECAI in accordance with Article 136.

Table 7

Credit Quality Step 1 2 3 4 5 6
Risk weight 20 % 50 % 100 % 150 % 150 % 150 %

 

Article 132

Own funds requirements for exposures in the form of units or shares in CIUs

1. Institutions shall calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the risk-weighted exposure amount of the CIU’s exposures, calculated in accordance with the approaches referred to in the first subparagraph of paragraph 2, with the percentage of units or shares held by those institutions.

2.  Where the conditions set out in paragraph 3 are met, institutions may apply the look-through approach in accordance with Article 132a(1) or the mandate-based approach in accordance with Article 132a(2).

Subject to Article 132b(2), institutions that do not apply the look-through approach or the mandate-based approach shall assign a risk weight of 1,250% (“fall-back approach”) to their exposures in the form of units or shares in a CIU.

Institutions may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by using a combination of the approaches referred to in this paragraph, provided that the conditions for using those approaches are met.

3. Institutions may determine the risk-weighted exposure amount of a CIU’s exposures in accordance with the approaches set out in Article 132a where all the following conditions are met:

  1. the CIU’s prospectus or equivalent document includes the following:
    1. the categories of assets in which the CIU is authorised to invest;
    2. where investment limits apply, the relative limits and the methodologies to calculate them;
  2. reporting by the CIU or the CIU management company to the institution complies with the following requirements:
    1. the exposures of the CIU are reported at least quarterly;
    2. the granularity of the financial information is sufficient to allow the institution to calculate the CIU’s risk-weighted exposure amount in accordance with the approach chosen by the institution;
    3. where the institution applies the look-through approach, information about the underlying exposures is verified by an independent third party.

By way of derogation from point (b)(i), where the institution determines the risk-weighted exposure amount of a CIU’s exposures in accordance with the mandate-based approach, the reporting by the CIU or the CIU management company to the institution may be limited to the investment mandate of the CIU and any changes thereof and may be done only when the institution incurs the exposure to the CIU for the first time and when there is a change in the investment mandate of the CIU. 

4. Institutions that do not have adequate data or information to calculate the risk-weighted exposure amount of a CIU’s exposures in accordance with the approaches set out in Article 132a may rely on the calculations of a third party where all the following conditions are met:

  1. the third party is one of the following:
    1. the depository institution or the depository financial institution of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution;           
    2. for CIUs not covered by point (i), the CIU management company, provided that the company meets the condition set out in point (a) of paragraph 3;
  2. the third party carries out the calculation in accordance with the approaches set out in Article 132a(1), (2) or (3), as applicable;
  3. an external auditor has confirmed the correctness of the third party’s calculation.

Institutions that rely on third-party calculations shall multiply the risk-weighted exposure amount of a CIU’s exposures resulting from those calculations by a factor of 1.2.

By way of derogation from the second subparagraph, where the institution has unrestricted access to the detailed calculations carried out by the third party, the factor of 1.2 shall not apply. The institution shall provide those calculations to the GFSC upon request.

5.  Where an institution applies the approaches referred to in Article 132a for the purpose of calculating the risk-weighted exposure amount of a CIU’s exposures (“level 1 CIU”), and any of the underlying exposures of the level 1 CIU is an exposure in the form of units or shares in another CIU (“level 2 CIU”), the risk-weighted exposure amount of the level 2 CIU’s exposures may be calculated by using any of the three approaches described in paragraph 2 of this Article. The institution may use the look-through approach to calculate the risk-weighted exposure amounts of CIUs’ exposures in level 3 and any subsequent level only where it used that approach for the calculation in the preceding level. In any other scenario it shall use the fall-back approach.

6.  The risk-weighted exposure amount of a CIU’s exposures calculated in accordance with the look-through approach and the mandate-based approach set out in Article 132a(1) and (2) shall be capped at the risk-weighted amount of that CIU’s exposures calculated in accordance with the fall-back approach. 

7.  By way of derogation from paragraph 1, institutions that apply the look-through approach in accordance with Article 132a(1) may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures, calculated in accordance with Article 111, with the risk weight (RW*) calculated in accordance with the formula set out in Article 132c, where the following conditions are met:

  1. the institutions measure the value of their holdings of units or shares in a CIU at historical cost but measure the value of the underlying assets of the CIU at fair value if they apply the look-through approach;
  2. a change in the market value of the units or shares for which institutions measure the value at historical cost changes neither the amount of own funds of those institutions nor the exposure value associated with those holdings.

8.  An institution must notify the GFSC if either:

  1. the total risk weighted exposure amounts for all of its exposures in the form of units or shares in relevant CIUs exceed 0.5% of the institution’s total risk weighted exposures  for credit risk and dilution risk calculated in accordance with Title II of Part Three; or
  2. the total exposure values for all of its exposures in the form of units or shares in relevant CIUs exceed £500 million;

in each case calculated on an individual or consolidated basis.

9.  Institutions must make the notification in paragraph 8 promptly if:

  1. at any time either of the thresholds in paragraph 8(a) or (b) is reached; and
  2. until such time as it makes a notification under paragraph 10, on an annual basis thereafter.

10.  Institutions which have made or are required to have made a notification under paragraph 8 must also notify the GFSC promptly when both the total risk weighted exposure amounts and total exposure values are below the relevant thresholds set out paragraph 8(a) and (b).

11.  Institutions must include in the notification made under paragraph 8:

  1. a list of the countries in which fund managers of all relevant CIUs to which it is exposed are located; and
  2. the total exposure values and total risk weighted exposure amounts in respect of its exposures in the form of units or shares in relevant CIUs for each of those countries.

 

Article 132a 

Approaches for calculating risk-weighted exposure amounts of CIUs

1.  Where the conditions set out in Article 132(3) are met, institutions that have sufficient information about the individual underlying exposures of a CIU shall look through to those exposures to calculate the risk-weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by those institutions.

2.  Where the conditions set out in Article 132(3) are met, institutions that do not have sufficient information about the individual underlying exposures of a CIU to use the look-through approach may calculate the risk-weighted exposure amount of those exposures in accordance with the limits set in the CIU’s mandate and relevant law.

Institutions shall carry out the calculations referred to in the first subparagraph under the assumption that the CIU first incurs exposures to the maximum extent allowed under its mandate or relevant law in the exposures attracting the highest own funds requirement and then continues incurring exposures in descending order until the maximum total exposure limit is reached, and that the CIU applies leverage to the maximum extent allowed under its mandate or relevant law, where applicable.

Institutions shall carry out the calculations referred to in the first subparagraph in accordance with the methods set out in this Chapter, in Chapter 5, and in Section 3, 4 or 5 of Chapter 6 of this Title.

3.  By way of derogation from Article 92(3)(d), institutions that calculate the risk-weighted exposure amount of a CIU’s exposures in accordance with paragraph 1 or 2 may calculate the own funds requirement for the credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50% of the own funds requirement for those derivative exposures calculated in accordance with Section 3, 4 or 5 of Chapter 6 of this Title, as applicable.

By way of derogation from the first subparagraph, an institution may exclude from the calculation of the own funds requirement for credit valuation adjustment risk derivative exposures which would not be subject to that requirement if they were incurred directly by the institution.

4.  Where institutions calculate the risk-weighted exposure amount of a CIU's exposures in accordance with paragraph 2 of this Article, and where one or more of the inputs required for the calculation in Section 3, 4 or 5 of Chapter 6 of Title Two is not available, institutions shall carry out the calculation as follows:

Where the replacement cost is unknown, institutions shall set the replacement cost as referred to in Articles 274(2) and 282(2) equal to the sum of the notional amounts of the derivatives in the netting set, and where relevant the multiplier referred to in Article 278(1) shall be set equal to 1.

Where the potential future exposure is unknown, institutions shall set the potential future exposure as referred to in Articles 274(2) and 282(2) equal to 15% of the sum of the notional amounts of the derivatives in the netting set. 

 

Article 132b

Exclusions from the approaches for calculating risk-weighted exposure amounts of CIUs

1.  Institutions may exclude from the calculations referred to in Article 132 Common Equity Tier 1, Additional Tier 1, Tier 2 instruments and eligible liabilities instruments held by a CIU which institutions shall deduct in accordance with Article 36(1) and Articles 56, 66 and 72e respectively.

2.  Institutions may exclude from the calculations referred to in Article 132 exposures in the form of units or shares in CIUs referred to in Article 150(1)(g) and (h) and instead apply the treatment set out in Article 133 to those exposures.

 

Article 132c

Treatment of off-balance-sheet exposures to CIUs

Institutions shall calculate the risk-weighted exposure amount for their off-balance-sheet items with the potential to be converted into exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures calculated in accordance with Article 111, with the following risk weight:

  1. for all exposures for which institutions use one of the approaches set out in Article 132a:

 

where:

RW*i = the risk weight;

i = the index denoting the CIU;

RWAEi = the amount calculated in accordance with Article 132a for a CIUi;

E*i = the exposure value of the exposures of CIUi;

Ai = the accounting value of assets of CIUi; and

EQi = the accounting value of the equity of CIUi;

(b)   for all other exposures, RW*i = 1,250%.  

 

Article 133

Equity exposures 

1. The following exposures shall be considered equity exposures:

  1. non-debt exposures conveying a subordinated, residual claim on the assets or income of the issuer;
  2. debt exposures and other securities, partnerships, derivatives, or other vehicles, the economic substance of which is similar to the exposures specified in point (a).

2. Equity exposures shall be assigned a risk weight of 100 %, unless they are required to be deducted in accordance with Part Two, assigned a 250 % risk weight in accordance with Article 48(4), assigned a 1 250  % risk weight in accordance with Article 89(3) or treated as high risk items in accordance with Article 128.

3. Investments in equity or regulatory capital instruments issued by institutions shall be classified as equity claims, unless deducted from own funds or attracting a 250 % risk weight under Article 48(4) or treated as high risk items in accordance with Article 128. 

 

Article 134

Other items

1. Tangible assets within the meaning of item 10 of the balance sheet format specified in Part 2 of the Financial Services (Credit Institutions) (Accounts) Regulations 2021 shall be assigned a risk weight of 100 %.

2. Prepayments and accrued income for which an institution is unable to determine the counterparty in accordance with the Financial Services (Credit Institutions) (Accounts) Regulations 2021, shall be assigned a risk weight of 100 %.

3. Cash items in the process of collection shall be assigned a 20 % risk weight. Cash in hand and equivalent cash items shall be assigned a 0 % risk weight.

4. Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities shall be assigned a 0 % risk weight.

5. In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight shall be that assigned to the assets in question and not to the counterparties to the transactions.

6. Where an institution provides credit protection for a number of exposures subject to the condition that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, the risk weights of the exposures included in the basket will be aggregated, excluding n-1 exposures, up to a maximum of 1 250  % and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted exposure amount. The n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggregation. 

7. The exposure value for leases shall be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option the exercise of which is reasonably certain. A party other than the lessee may be required to make a payment related to the residual value of a leased property and that payment obligation fulfils the set of conditions in Article 201 regarding the eligibility of protection providers as well as the requirements for recognising other types of guarantees provided in Articles 213 to 215, that payment obligation may be taken into account as unfunded credit protection under Chapter 4. These exposures shall be assigned to the relevant exposure class in accordance with Article 112. When the exposure is a residual value of leased assets, the risk-weighted exposure amounts shall be calculated as follows: 1/t * 100 % * residual value, where t is the greater of 1 and the nearest number of whole years of the lease remaining.

 

Article 135

Use of credit assessments by ECAIs 

1. An external credit assessment may be used to determine the risk weight of an exposure under this Chapter only if it has been issued by an ECAI or has been endorsed by an ECAI in accordance with the CRA Regulation.

2. The GFSC shall publish the list of ECAIs on its website. 

 

Article 136 

Omitted

 

Article 137

Use of credit assessments by export credit agencies

1. For the purpose of Article 114, institutions may use credit assessments of an Export Credit Agency that the institution has nominated, if either of the following conditions is met:

  1. it is a consensus risk score from export credit agencies participating in the OECD Arrangement on Guidelines for Officially Supported Export Credits ;
  2. the Export Credit Agency publishes its credit assessments, and the Export Credit Agency subscribes to the OECD agreed methodology, and the credit assessment is associated with one of the eight minimum export insurance premiums that the OECD agreed methodology establishes. An institution may revoke its nomination of an Export Credit Agency. An institution shall substantiate the revocation if there are concrete indications that the intention underlying the revocation is to reduce the capital adequacy requirements.

2. Exposures for which a credit assessment by an Export Credit Agency is recognised for risk weighting purposes shall be assigned a risk weight in accordance with Table 9.

Table 9

MEIP 0 1 2 3 4 5 6 7
Risk weight 0 % 0 % 20 % 50 % 100 % 100 % 100 % 150 %

 

Article 138

General requirements

An institution may nominate one or more ECAIs to be used for the determination of risk weights to be assigned to assets and off-balance sheet items. An institution may revoke its nomination of an ECAI. An institution shall substantiate the revocation if there are concrete indications that the intention underlying the revocation is to reduce the capital adequacy requirements. Credit assessments shall not be used selectively. An institution shall use solicited credit assessments. However it may use unsolicited credit assessments if the GFSC has confirmed that unsolicited credit assessments of an ECAI do not differ in quality from solicited credit assessments of this ECAI. The GFSC must refuse or revoke this confirmation in particular if the ECAI has used an unsolicited credit assessment to put pressure on the rated entity to place an order for a credit assessment or other services. In using credit assessment, institutions shall comply with the following requirements:

  1. an institution which decides to use the credit assessments produced by an ECAI for a certain class of items shall use those credit assessments consistently for all exposures belonging to that class;
  2. an institution which decides to use the credit assessments produced by an ECAI shall use them in a continuous and consistent way over time;
  3. an institution shall only use ECAIs credit assessments that take into account all amounts both in principal and in interest owed to it;
  4. where only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment shall be used to determine the risk weight for that item;
  5. where two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated item, the higher risk weight shall be assigned;
  6. where more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights shall be referred to. If the two lowest risk weights are different, the higher risk weight shall be assigned. If the two lowest risk weights are the same, that risk weight shall be assigned.

 

Article 139

Issuer and issue credit assessment

1. Where a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure belongs, this credit assessment shall be used to determine the risk weight to be assigned to that item.

2. Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment shall be used in either of the following cases:

  1. it produces a higher risk weight than would otherwise be the case and the exposure in question ranks pari passu or junior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer, as relevant;
  2. it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects to the specific issuing programme or facility or to senior unsecured exposures of that issuer, as relevant.

In all other cases, the exposure shall be treated as unrated.

3. Paragraphs 1 and 2 are not to prevent the application of Article 129.

4. Credit assessments for issuers within a corporate group cannot be used as credit assessment of another issuer within the same corporate group. 

 

Article 140 

Long-term and short-term credit assessments 

1. Short-term credit assessments may only be used for short-term asset and off-balance sheet items constituting exposures to institutions and corporates.

2. Any short-term credit assessment shall only apply to the item the short-term credit assessment refers to, and it shall not be used to derive risk weights for any other item, except in the following cases:

  1. if a short-term rated facility is assigned a 150 % risk weight, then all unrated unsecured exposures on that obligor whether short-term or long-term shall also be assigned a 150 % risk weight;
  2. if a short-term rated facility is assigned a 50 % risk-weight, no unrated short-term exposure shall be assigned a risk weight lower than 100 %.

 

Article 141 

Domestic and foreign currency items

A credit assessment that refers to an item denominated in the obligor's domestic currency cannot be used to derive a risk weight for another exposure on that same obligor that is denominated in a foreign currency.

When an exposure arises through an institution's participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, the credit assessment on the obligors' domestic currency item may be used for risk weighting purposes.

 

Article 142

Definitions

1. For the purposes of this Chapter, the following definitions shall apply:

  1. rating system means all of the methods, processes, controls, data collection and IT systems that support the assessment of credit risk, the assignment of exposures to rating grades or pools, and the quantification of default and loss estimates that have been developed for a certain type of exposures;
  2. type of exposures means a group of homogeneously managed exposures which are formed by a certain type of facilities and which may be limited to a single entity or a single sub-set of entities within a group provided that the same type of exposures is managed differently in other entities of the group;
  3. business unit means any separate organisational or legal entities, business lines, geographical locations;
  4. large financial sector entity means any financial sector entity which meets the following conditions:

    (a)   its total assets, calculated on an individual or consolidated basis, are greater than or equal to a EUR 70 billion threshold, using the most recent audited financial statement or consolidated financial statement in order to determine asset size; and

    (b)   it is, or one of its subsidiaries is, subject to prudential regulation in Gibraltar or to the laws of a third country which applies prudential supervisory and regulatory requirements at least equivalent to those applied in Gibraltar;

  5. unregulated financial sector entity means an entity that is not a regulated financial sector entity but that performs, as its main business, one or more of the activities in the Schedule to the CICR Regulations or Parts 6 and 10 of Schedule 2 to the Act;
  6. obligor grade means a risk category within the obligor rating scale of a rating system, to which obligors are assigned on the basis of a specified and distinct set of rating criteria, from which estimates of probability of default (PD) are derived;
  7. facility grade means a risk category within a rating system's facility scale, to which exposures are assigned on the basis of a specified and distinct set of rating criteria, from which own estimates of LGD are derived.
2. For the purposes of paragraph 1(4)(b), the Minister may by regulations make a determination that a third country applies supervisory and regulatory arrangements at least equivalent to those applied in Gibraltar. 

 

Article 143

Permission to use the IRB Approach

1. Where the conditions set out in this Chapter are met, the GFSC shall permit institutions to calculate their risk-weighted exposure amounts using the Internal Ratings Based Approach (hereinafter referred to as IRB Approach ).

2. Prior permission to use the IRB Approach, including own estimates of LGD and conversion factors, shall be required for each exposure class and for each rating system and internal models approaches to equity exposures and for each approach to estimating LGDs and conversion factors used.

3. Institutions shall obtain the prior permission of the GFSC for the following:

  1. material changes to the range of application of a rating system or an internal models approach to equity exposures that the institution has received permission to use;
  2. material changes to a rating system or an internal models approach to equity exposures that the institution has received permission to use.

The range of application of a rating system shall comprise all exposures of the relevant type of exposure for which that rating system was developed.

4. Institutions shall notify the GFSC of all changes to rating systems and internal models approaches to equity exposures.

5. The Minister may make technical standards specifying the conditions for assessing the materiality of the use of an existing rating system for other additional exposures not already covered by that rating system and changes to rating systems or internal models approaches to equity exposures under the IRB Approach.

 

Article 144

GFSC's assessment of an application to use an IRB Approach

1. The competent authority shall grant permission pursuant to Article 143 for an institution to use the IRB Approach, including to use own estimates of LGD and conversion factors, only if the competent authority is satisfied that requirements laid down in this Chapter are met, in particular those laid down in Section 6, and that the systems of the institution for the management and rating of credit risk exposures are sound and implemented with integrity and, in particular, that the institution has demonstrated to the satisfaction of the competent authority that the following standards are met:

  1. the institution's rating systems provide for a meaningful assessment of obligor and transaction characteristics, a meaningful differentiation of risk and accurate and consistent quantitative estimates of risk;
  2. internal ratings and default and loss estimates used in the calculation of own funds requirements and associated systems and processes play an essential role in the risk management and decision-making process, and in the credit approval, internal capital allocation and corporate governance functions of the institution;
  3. the institution has a credit risk control unit responsible for its rating systems that is appropriately independent and free from undue influence;
  4. the institution collects and stores all relevant data to provide effective support to its credit risk measurement and management process;
  5. the institution documents its rating systems and the rationale for their design and validates its rating systems;
  6. the institution has validated each rating system and each internal models approach for equity exposures during an appropriate time period prior to the permission to use this rating system or internal models approach to equity exposures, has assessed during this time period whether the rating system or internal models approaches for equity exposures are suited to the range of application of the rating system or internal models approach for equity exposures, and has made necessary changes to these rating systems or internal models approaches for equity exposures following from its assessment;
  7. the institution has calculated under the IRB Approach the own funds requirements resulting from its risk parameters estimates and is able to submit the reporting as required by Article 430;
  8. the institution has assigned and continues with assigning each exposure in the range of application of a rating system to a rating grade or pool of this rating system; the institution has assigned and continues with assigning each exposure in the range of application of an approach for equity exposures to this internal models approach.

The requirements to use an IRB Approach, including own estimates of LGD and conversion factors, apply also where an institution has implemented a rating system, or model used within a rating system, that it has purchased from a third-party vendor.

2. The Minister may make technical standards specifying the assessment methodology the GFSC shall follow in assessing the compliance of an institution with the requirements to use the IRB Approach.

 

Article 145

Prior experience of using IRB approaches 

1. An institution applying to use the IRB Approach shall have been using for the IRB exposure classes in question rating systems that were broadly in line with the requirements set out in Section 6 for internal risk measurement and management purposes for at least three years prior to its qualification to use the IRB Approach.

2. An institution applying for the use of own estimates of LGDs and conversion factors shall demonstrate to the satisfaction of the GFSC that it has been estimating and employing own estimates of LGDs and conversion factors in a manner that is broadly consistent with the requirements for use of own estimates of those parameters set out in Section 6 for at least three years prior to qualification to use own estimates of LGDs and conversion factors.

3. Where the institution extends the use of the IRB Approach subsequent to its initial permission, the experience of the institution shall be sufficient to satisfy the requirements of paragraphs 1 and 2 in respect of the additional exposures covered. If the use of rating systems is extended to exposures that are significantly different from the scope of the existing coverage, such that the existing experience cannot be reasonably assumed to be sufficient to meet the requirements of these provisions in respect of the additional exposures, then the requirements of paragraphs 1 and 2 shall apply separately for the additional exposures.

 

Article 146

Measures to be taken where the requirements of this Chapter cease to be met

Where an institution ceases to comply with the requirements laid down in this Chapter, it shall notify the GFSC and do one of the following:

  1. present to the satisfaction of the GFSC a plan for a timely return to compliance and realise this plan within a period agreed with the GFSC;
  2. demonstrate to the satisfaction of the GFSC that the effect of non-compliance is immaterial.

 

Article 147

Methodology to assign exposures to exposure classes

1. The methodology used by the institution for assigning exposures to different exposure classes shall be appropriate and consistent over time.

2. Each exposure shall be assigned to one of the following exposure classes:

  1. exposures to central governments and central banks;
  2. exposures to institutions;
  3. exposures to corporates;
  4. retail exposures;
  5. equity exposures;
  6. items representing securitisation positions;
  7. other non credit-obligation assets.

3. The following exposures shall be assigned to the class laid down in point (a) of paragraph 2:

  1. exposures to regional governments, local authorities or public sector entities which are treated as exposures to central governments under Articles 115 and 116;
  2. exposures to multilateral development banks referred to in Article 117(2);
  3. exposures to International Organisations which attract a risk weight of 0 % under Article 118.

4. The following exposures shall be assigned to the class laid down in point (b) of paragraph 2:

  1. exposures to regional governments and local authorities which are not treated as exposures to central governments in accordance with Article 115(2) and (4);
  2. exposures to public sector entities which are not treated as exposures to central governments in accordance with Article 116(4);
  3. exposures to multilateral development banks which are not assigned a 0 % risk weight under Article 117; and
  4. exposures to financial institutions which are treated as exposures to institutions in accordance with Article 119(5).

5. To be eligible for the retail exposure class laid down in point (d) of paragraph 2, exposures shall meet the following criteria:

  1. they shall be one of the following:
    1. exposures to one or more natural persons;
    2. exposures to an SME, provided in that case that the total amount owed to the institution and parent undertakings and its subsidiaries, including any past due exposure, by the obligor client or group of connected clients, but excluding exposures secured on residential property collateral, shall not, to the knowledge of the institution, which shall have taken reasonable steps to confirm the situation, exceed EUR 1 million;
  2. they are treated by the institution in its risk management consistently over time and in a similar manner;
  3. they are not managed just as individually as exposures in the corporate exposure class;
  4. they each represent one of a significant number of similarly managed exposures.

In addition to the exposures listed in the first subparagraph, the present value of retail minimum lease payments shall be included in the retail exposure class.

6. The following exposures shall be assigned to the equity exposure class laid down in point (e) of paragraph 2:

  1. non-debt exposures conveying a subordinated, residual claim on the assets or income of the issuer;
  2. debt exposures and other securities, partnerships, derivatives, or other vehicles, the economic substance of which is similar to the exposures specified in point (a).

7. Any credit obligation not assigned to the exposure classes laid down in points (a), (b), (d), (e) and (f) of paragraph 2 shall be assigned to the corporate exposure class referred to in point (c) of that paragraph.

8. Within the corporate exposure class laid down in point (c) of paragraph 2, institutions shall separately identify as specialised lending exposures, exposures which possess the following characteristics:

  1. the exposure is to an entity which was created specifically to finance or operate physical assets or is an economically comparable exposure;
  2. the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate;
  3. the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise.

9. The residual value of leased properties shall be assigned to the exposure class laid down in point (g) of paragraph 2, except to the extent that residual value is already included in the lease exposure laid down in Article 166(4).

10. The exposure from providing protection under an nth-to-default basket credit derivative shall be assigned to the same class laid down in paragraph 2 to which the exposures in the basket would be assigned, except if the individual exposures in the basket would be assigned to various exposure classes in which case the exposure shall be assigned to the corporates exposure class laid down in point (c) of paragraph 2. 

 

Article 148

Conditions for implementing the IRB Approach across different classes of exposure and business units

1. Institutions and any parent undertaking and its subsidiaries shall implement the IRB Approach for all exposures, unless they have received the permission of the GFSC to permanently use the Standardised Approach in accordance with Article 150.

Subject to the prior permission of the GFSC, implementation may be carried out sequentially across the different exposure classes referred to in Article 147 within the same business unit, across different business units in the same group or for the use of own estimates of LGDs or conversion factors for the calculation of risk weights for exposures to corporates, institutions, and central governments and central banks.

In the case of the retail exposure class referred to in Article 147(5), implementation may be carried out sequentially across the categories of exposures to which the different correlations in Article 154 correspond.

2. The GFSC shall determine the time period over which an institution and any parent undertaking and its subsidiaries shall be required to implement the IRB Approach for all exposures. This time period shall be one that the GFSC considers to be appropriate on the basis of the nature and scale of the activities of the institutions, or any parent undertaking and its subsidiaries, and the number and nature of rating systems to be implemented.

3. Institutions shall carry out implementation of the IRB Approach in accordance with conditions determined by the GFSC. The GFSC shall design those conditions such that they ensure that the flexibility under paragraph 1 is not used selectively for the purposes of achieving reduced own funds requirements in respect of those exposure classes or business units that are yet to be included in the IRB Approach or in the use of own estimates of LGDs and conversion factors.

4. Institutions that have begun to use the IRB Approach only after 1 January 2013 or that have until that date been required by the GFSC to be able to calculate their capital requirements using the Standardised Approach shall retain their ability to calculate capital requirements using the Standardised Approach for all their exposures during the implementation period until the GFSC notifies them that they are satisfied that the implementation of the IRB Approach will be completed with reasonable certainty.

5. An institution that is permitted to use the IRB Approach for any exposure class shall use the IRB Approach for the equity exposure class laid down in point (e) of Article 147(2), except where that institution is permitted to apply the Standardised Approach for equity exposures pursuant to Article 150 and for the other non credit-obligation assets exposure class laid down in point (g) of Article 147(2).

6. The Minister may make technical standards specifying the conditions according to which the GFSC shall determine the appropriate nature and timing of the sequential roll out of the IRB Approach across exposure classes referred to in paragraph 3.

 

Article 149

Conditions to revert to the use of less sophisticated approaches

1. An institution that uses the IRB Approach for a particular exposure class or type of exposure shall not stop using that approach and use instead the Standardised Approach for the calculation of risk-weighted exposure amounts unless the following conditions are met:

  1. the institution has demonstrated to the satisfaction of the GFSC that the use of the Standardised Approach is not proposed in order to reduce the own funds requirement of the institution, is necessary on the basis of nature and complexity of the institution's total exposures of this type and would not have a material adverse impact on the solvency of the institution or its ability to manage risk effectively;
  2. the institution has received the prior permission of the GFSC.

2. Institutions which have obtained permission under Article 151(9) to use own estimates of LGDs and conversion factors, shall not revert to the use of LGD values and conversion factors referred to in Article 151(8) unless the following conditions are met:

  1. the institution has demonstrated to the satisfaction of the GFSC that the use of LGDs and conversion factors laid down in Article 151(8) for a certain exposure class or type of exposure is not proposed in order to reduce the own funds requirement of the institution, is necessary on the basis of nature and complexity of the institution's total exposures of this type and would not have a material adverse impact on the solvency of the institution or its ability to manage risk effectively;
  2. the institution has received the prior permission of the GFSC.

3. The application of paragraphs 1 and 2 is subject to the conditions for rolling out the IRB Approach determined by the GFSC in accordance with Article 148 and the permission for permanent partial use referred to in Article 150. 

 

Article 150

Conditions for permanent partial use

1. Where institutions have received the prior permission of the GFSC, institutions permitted to use the IRB Approach in the calculation of risk-weighted exposure amounts and expected loss amounts for one or more exposure classes may apply the Standardised Approach for the following exposures:

  1. the exposure class laid down in Article 147(2)(a), where the number of material counterparties is limited and it would be unduly burdensome for the institution to implement a rating system for these counterparties;
  2. the exposure class laid down in Article 147(2)(b), where the number of material counterparties is limited and it would be unduly burdensome for the institution to implement a rating system for these counterparties;
  3. exposures in non-significant business units as well as exposure classes or types of exposures that are immaterial in terms of size and perceived risk profile;
  4. exposures to the government or a public sector entity in Gibraltar provided that:
    1. there is no difference in risk between the exposures to the government and those other exposures because of specific public arrangements; and
    2. exposures to the government are assigned a 0 % risk weight under Article 114(2) or (4);
  5. exposures of an institution to a counterparty which is its parent undertaking, its subsidiary or a subsidiary of its parent undertaking provided that the counterparty is an institution or a financial holding company, mixed financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements or an undertaking linked by a common management relationship;
  6. exposures between institutions which meet the requirements set out in Article 113(7);
  7. equity exposures to entities whose credit obligations are assigned a 0 % risk weight under Chapter 2 including those publicly sponsored entities where a 0 % risk weight can be applied;
  8. equity exposures incurred under legislative programmes to promote specified sectors of the economy that provide significant subsidies for the investment to the institution and involve some form of government oversight and restrictions on the equity investments where such exposures may in aggregate be excluded from the IRB Approach only up to a limit of 10 % of own funds;
  9. the exposures identified in Article 119(4) meeting the conditions specified therein;
  10. State and State-reinsured guarantees referred to in Article 215(2).

2. For the purposes of paragraph 1, the equity exposure class of an institution shall be material if their aggregate value, excluding equity exposures incurred under legislative programmes as referred to in point (h) of paragraph 1, exceeds on average over the preceding year 10 % of the own funds of the institution. Where the number of those equity exposures is less than 10 individual holdings, that threshold shall be 5 % of the own funds of the institution.

3. The Minister may make technical standards specifying the conditions of application of points (a), (b) and (c) of paragraph 1.

 

Article 151

Treatment by exposure class

1. The risk-weighted exposure amounts for credit risk for exposures belonging to one of the exposure classes referred to in points (a) to (e) and (g) of 147(2) shall, unless deducted from own funds, be calculated in accordance with Sub-section 2 except where those exposures are deducted from Common Equity Tier 1 items, Additional Tier 1 items or Tier 2 items.

2. The risk-weighted exposure amounts for dilution risk for purchased receivables shall be calculated in accordance with Article 157. Where an institution has full recourse to the seller of purchased receivables for default risk and for dilution risk, the provisions of this Article and Article 152 and Article 158(1) to (4) in relation to purchased receivables shall not apply and the exposure shall be treated as a collateralised exposure.

3. The calculation of risk-weighted exposure amounts for credit risk and dilution risk shall be based on the relevant parameters associated with the exposure in question. These shall include PD, LGD, maturity (hereinafter referred to as M ) and exposure value of the exposure. PD and LGD may be considered separately or jointly, in accordance with Section 4.

4. Institutions shall calculate risk-weighted exposure amounts for credit risk for all exposures belonging to the exposure class equity referred to in point (e) of Article 147(2) in accordance with Article 155. Institutions may use the approaches set out in Article 155(3) and (4) where they have received the prior permission of the GFSC. The GFSC shall grant permission for an institution to use the internal models approach set out in Article 155(4) provided that the institution meets the requirements set out in Sub-section 4 of Section 6.

5. The calculation of risk weighted exposure amounts for credit risk for specialised lending exposures may be calculated in accordance with Article 153(5).

6. For exposures belonging to the exposure classes referred to in points (a) to (d) of Article 147(2), institutions shall provide their own estimates of PDs in accordance with Article 143 and Section 6.

7. For exposures belonging to the exposure class referred to in point (d) of Article 147(2), institutions shall provide own estimates of LGDs and conversion factors in accordance with Article 143 and Section 6.

8. For exposures belonging to the exposure classes referred to in points (a) to (c) of Article 147(2), institutions shall apply the LGD values set out in Article 161(1), and the conversion factors set out in Article 166(8)(a) to (d), unless it has been permitted to use its own estimates of LGDs and conversion factors for those exposure classes in accordance with paragraph 9.

9. For all exposures belonging to the exposure classes referred to in points (a) to (c) of Article 147(2), the GFSC shall permit institutions to use own estimates of LGDs and conversion factors in accordance with Article 143 and Section 6.

10. The risk-weighted exposure amounts for securitised exposures and for exposures belonging to the exposure class referred to in point (f) of Article 147(2) shall be calculated in accordance with Chapter 5. 

 

Article 152

Treatment of exposures in the form of units or shares in CIUs

1.  Institutions shall calculate the risk-weighted exposure amounts for their exposures in the form of units or shares in a CIU by multiplying the risk-weighted exposure amount of the CIU, calculated in accordance with the approaches set out in paragraphs 2 and 5, with the percentage of units or shares held by those institutions.

2.  Where the conditions set out in Article 132(3) are met, institutions that have sufficient information about the individual underlying exposures of a CIU shall look through to those underlying exposures to calculate the risk-weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by the institutions.

3.  By way of derogation from Article 92(3)(d), institutions that calculate the risk-weighted exposure amount of the CIU in accordance with paragraph 1 or 2 may calculate the own funds requirement for credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50% of the own funds requirement for those derivative exposures calculated in accordance with Section 3, 4 or 5 of Chapter 6 of this Title, as applicable.

By way of derogation from the first subparagraph, an institution may exclude from the calculation of the own funds requirement for credit valuation adjustment risk derivative exposures which would not be subject to that requirement if they were incurred directly by the institution.

4.  Institutions that apply the look-through approach in accordance with paragraphs 2 and 3 and that meet the conditions for permanent partial use in accordance with Article 150, or that do not meet the conditions for using the methods set out in this Chapter or one or more of the methods set out in Chapter 5 for all or parts of the underlying exposures of the CIU, shall calculate risk-weighted exposure amounts and expected loss amounts in accordance with the following principles:

  1. for exposures assigned to the equity exposure class referred to in Article 147(2)(e), institutions shall apply the simple risk-weight approach set out in Article 155(2);
  2. for exposures assigned to the items representing securitisation positions referred to in Article 147(2)(f), institutions shall apply the treatment set out in Article 254 as if those exposures were directly held by those institutions;
  3. for all other underlying exposures, institutions shall apply the Standardised Approach laid down in Chapter 2 of this Title.

For the purposes of point (a) of the first subparagraph, where the institution is unable to differentiate between private equity exposures, exchange-traded exposures and other equity exposures, it shall treat the exposures concerned as other equity exposures.

5.  Where the conditions set out in Article 132(3) are met, institutions that do not have sufficient information about the individual underlying exposures of a CIU may calculate the risk-weighted exposure amount for those exposures in accordance with the mandate-based approach set out in Article 132a(2). However, for the exposures listed in points (a), (b) and (c) of paragraph 4, institutions shall apply the approaches set out in those points.

6.  Subject to Article 132b(2), institutions that do not apply the look-through approach in accordance with paragraphs 2 and 3 or the mandate-based approach in accordance with paragraph 5 shall apply the fall-back approach referred to in Article 132(2).

7.  Institutions may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by using a combination of the approaches referred to in this Article where the conditions for using those approaches are met.

8.  Institutions that do not have adequate data or information to calculate the risk-weighted amount of a CIU in accordance with the approaches set out in paragraphs 2, 3, 4 and 5 may rely on the calculations of a third party where all the following conditions are met:

  1. the third party is one of the following:
    1. the depository institution or the depository financial institution of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution; or
    2. for CIUs not covered by point (i), the CIU management company;
  2. for exposures other than those listed in points (a), (b) and (c) of paragraph 4, the third party carries out the calculation in accordance with the look-through approach set out in Article 132a(1);
  3. for exposures listed in points (a), (b) and (c) of paragraph 4, the third party carries out the calculation in accordance with the approaches set out in those points; and
  4. an external auditor has confirmed the correctness of the third party’s calculation.

Institutions that rely on third-party calculations shall multiply the risk-weighted exposure amounts of a CIU’s exposures resulting from those calculations by a factor of 1.2.

By way of derogation from the second subparagraph, where the institution has unrestricted access to the detailed calculations carried out by the third party, the 1.2 factor shall not apply. The institution shall provide those calculations to the GFSC upon request.

9.  For the purposes of this Article:

  1. Articles 132(5) and (6) and 132b shall apply; and
  2. Article 132c shall apply, using the risk weights calculated in accordance with Chapter 3 of this Title.