1.This guidance explains how banks should comply with the Tier Capital Instruments Standard. It must be read in conjunction with the Capital Regulation and Standards for Capital Adequacy of Banks in the UAE. It also ensures that banks issue robust and simple Tier capital instruments.

2.A bank needs to take into consideration the below points when issuing capital publicly or privately:

1. a.The Central Bank expects that issuers will formulate the terms and conditions so that they are not complex, but as simple and as clear as possible.
2. b.Prudential clauses of importance from a prudential point of view should not be written in italics. They should also not be worded in a way that makes it unclear whether they do actually apply (e.g. ‘it is expected that’, ‘if required by the regulation’, etc.). Terms and conditions must be worded clearly.
3. c.The wording used must be in accordance with that in the Capital Standards/ Guidance.
4. d.The text should avoid making references to ‘as determined by the bank’ or to regulatory reporting dates. All requirements must be fulfilled at any time.
5. e.It is not desirable to specify the reference to say ‘under applicable law’ or ‘if required by the applicable banking rules’ when it is clear that legal requirements come directly from the Central Bank, Capital Regulation, Standards or as Guidance.
6. f.A detailed list may easily create the impression that the list maybe exhaustive. The bank has to clearly note when a list is not exhaustive.

Distributable Items:

3.The definition of distributable items may change when the Central Bank introduces the solo level concept.

Subordination:

4.Additional Tier 1 instruments will rank below Tier 2 instruments by virtue of subordination. The instrument should not be subject to set-off or netting arrangements that would undermine the instrument's capacity to absorb losses.

Redemption Notices:

5.Where a notice has not been revoked as of the relevant date, it follows that a payment is due to the holder. Any non-payment thereafter may trigger an enforcement event. Any notice for redemption should become void and null as soon as the Central Bank declares that a PONV trigger event has occurred.

Call of Instruments:

1. a.Optional Call:
   The Central Bank does not prohibit the issuer to call the instrument at its option but only after a period of 5 years.
2. b.Regulatory Call:
   The Central Bank does not prohibit the issuer to call the instrument in case of a capital event so that they become or, as appropriate, remain, qualified regulatory capital. However, the amount in case of a capital event can be the outstanding amount or the amount that qualifies as regulatory capital, if some amount of the instrument is held by the issuer or whose purchase is funded by the issuer, save where such non-qualification is only as a result of any applicable limitation on the amount of such capital.
3. c.Tax Call:
   The Central Bank does not prohibit the issuer to call the instruments in case of a tax event. A tax event may occur at any time on or after the issue date. A tax event can occur as a result of a change in the applicable tax treatment of the instrument.

Note that both the optional call and the tax call require the Central Bank’s approval.

Changes of Terms and conditions:

a. Insignificant Changes to Terms and Conditions (Variation):

The issuer may vary the terms and conditions of the instrument subject to the condition of redemption in the Tier capital instrument Standard. Variation of the terms and conditions of the instrument can occur on optional call regulatory call, or tax call. Changes must be legally enforceable.

b. Significant Changes to Terms and Conditions:

Significant changes to the terms and conditions of the instrument will require the approval of the holders. Every instrument that undergoes significant changes needs to meet all requirements of the Tier Capital Instruments Standard.

Every instrument with changed terms and conditions need to be re-approved by the Central Bank by applying Stage 2 of the Approval Process in Appendix B of the Tier Capital Instruments Standard (Stage 1 of the Approval Process can be omitted in this case).

Coupon Payments:

6.No provision should link a change in payments to contractual, statutory or other obligations, as payments are fully discretionary. Payments should also not be linked to payments on other Additional Tier 1 instruments.

Dividend and Redemption Restrictions:

7.Dividend stopper arrangements that prevent for example dividend payments on common shares are not prohibited by the Central Bank. Furthermore, dividend stopper arrangements that prevent dividend payments on other Additional Tier 1 instruments are not prohibited by Central Bank. However, stoppers must not impede the full discretion that bank must have at all times to cancel distributions/payments on the instrument, nor must they act in a way that could hinder the recapitalization of the bank. For example, it would not be permitted for a stopper on an Additional Tier 1 instrument to:

1. i.attempt to stop payment on another instrument where the payments on this other instrument were not also fully discretionary;
2. ii.prevent distributions to shareholders for a period that extends beyond the point in time that dividends/coupons on the instrument are resumed;
3. iii.impede the normal operation of the bank or any restructuring activity (including acquisitions/disposals).

8.A dividend stopper may act to prohibit actions that are equivalent to the payment of dividend, such as the bank undertaking discretionary share buybacks. The dividend stopper will remain until one coupon following the dividend stopper date has been made in full or an amount equal to the same has been duly set aside or provided for in full for the benefit of the holders of the instrument.

Maximum Distributable Amount (MDA):

To further clarify the MDA’s calculation, below is an example of the calculation:

The bank first will need to fulfill all minimum requirements. As the bank only has CET1 capital available, it needs to use CET1 capital to fulfill all minimum capital requirements (10.5%=7%+1.5%+2%). After fulfilling the minimum capital requirements, the bank has still 3.5% (=14.0%-10.5%) CET1 capital available to fulfill the combined buffer requirements of 4%. Hence, the Bank’s capital gap is 0.5%.

From the table above 3.5% means that the bank is in the fourth of the buffer requirements. Therefore, the MDA is restricted to 60% of the bank’s earnings, which means the bank may distribute no other restrictions and limitations considered, up to 60% of the earnings in the form of dividend, Additional Tier 1 payments, and variable remuneration.

Note that items considered to be distributions include dividends and share buybacks, discretionary payments on other Tier 1 capital instruments and discretionary bonus payments to staff. Payments that do not result in a depletion of CET1, which may for example include certain scrip dividends, are not considered distributions.

Note also that earnings are defined as distributable profits calculated prior to the deduction of elements subject to the restriction on distributions. Earnings are calculated after the tax, which would have been reported had none of the distributable items been paid. As such, any tax impact of making, such distributions are reversed out. Where a bank does not have positive earnings and has a CET1 ratio less than 9.5%, it would be restricted from making positive net distributions.

Gross-up Clauses:

Gross-up clauses for Additional Tier 1:

9.Gross up clauses are acceptable only if:

1. i.It is activated by decision of the local tax authority of the issuer and not the investor,
2. ii.The increased payments do not exceed distributable items,
3. iii.The gross-up is in relation to the dividend and not the principal.

Gross up Clauses for Tier 2:

10.The second condition related to distributable items is not relevant for Tier 2 instruments, as Tier 2 coupons are not restricted by the amount of available distributable items. Therefore, Tier 2 gross-up clauses can be considered as acceptable if they are activated by a decision of the local tax authority of the issuer, and if they relate to dividend and not on principal. The other two conditions on gross-up clauses are, however, activation is still required by a local tax authority of the issuer and not the investor, and the gross-up is in relation to the dividend payments only not principal.

Point of Non-Viability (PONV):

11.The issuance of any new shares as a result of the Point of Non-Viability must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted.

Further guidance on grandfathering:

12.If a Tier 2 instrument eligible for grandfathering begins its final five-year amortisation period prior to 1st January 2018, the base for grandfathering in this case must take into account the amortised amount, not the full nominal amount. As for the rate, if a Tier 2 instrument eligible for grandfathering begins its final amortisation period on 1st January 2018, then individual instruments will continue to be amortised at a rate of 20% per year while the grandfathering cap will be reduced at a rate of 10% per year. Note that each tranche needs to be treated as a separate tranche.

Amortisation of Tier 2 instruments:

13.During the last 5 years of the eligibility before maturity, the eligibility of Tier 2 instruments is written down by 20% per year, i.e. the eligible amount is calculated by multiplying:

1. i.The nominal amount of the instruments on the first day of the final five year period of their contractual maturity divided by the number of calendar days in that period;
2. ii.The number of remaining calendar days until the contractual maturity of the instruments.

Documents required to be submitted for the application to issue new Tier Capital Instruments

1. 1.The CN-01 form should be completed, filled and signed by the bank's Chief Executive Officer (CEO), Chief Financial Officer (CFO), Head of Internal Audit, Head of Compliance and Head of Risk.
2. 2.Full terms and conditions, together with the risk factors relating to the instrument.
   1. i.Instruments of Islamic banks issued through an SPV must also provide the contract between the bank and the SPV
3. 3.Shareholder Approval:
   1. i.Tier capital instruments require shareholder approval.
   2. ii.The approval shall relate to an issuance of the specific planned Tier capital instrument (Additional Tier 1 or subordinated Tier 2). Moreover, the approval should clearly mention that the instrument is subordinated; coupon payments may not be paid under certain circumstances, and contains a Point of Non-Viability (PONV) condition.
4. 4.Legal opinion letters:
   1. i.Legal Opinion of an independent appropriately qualified and experienced lawyer that the terms and conditions are compliant with the requirements detailed in the Capital Regulations, Standards and Guidance.
   2. ii.Legal opinion of an independent appropriately qualified and experienced lawyer that the obligations contained in terms and conditions will constitute legal, valid, binding and enforceable obligations.
   3. iii.Legal opinion of an independent appropriately qualified and experienced lawyer that the Self-Assessment of the issuing bank meets the Conditions and the Capital Regulations
5. 5.Capital planning and forecast:

The Business as Usual (BAU) case should be formulated, such as:

1. a)Amount of assumed issuance and the expected issuance date (e.g. Q1 2018).
2. b)Capital structure: % in CET1, AT1, Tier 2 and deductions (using Basel 3 capital components)
3. c)Five (5) year forecast of the Balance sheet, Profit & loss P&L, Risk Weighted Assets RWA.
4. d)Amortization of Tier Capital Issuances: Subordinated Tier 2 in the last 5 years prior to maturity and AT1 Instruments, if they fall under a grandfathering rule, for example, 10% per year.
5. e)Key assumptions and analysis (e.g. on balance growth, asset structure, conversation factors CCF for off balance, operational and market risk, total assets growth, of which businesses that will be the main driver for such growth) and CRWA (i.e. on balance sheet exposure in different industry) in numerical as well as qualitative aspect.

6. Stress Testing Scenarios:

The Stress Testing should be submitted in form of a presentation including the underlying data in Excel sheet.

Two Scenarios should be provided as part of the presentation:

1. a)Top 2 customers defaulting (point in time analysis permitted: End of Year): Definition of top 2 customers; name of top 2 customers; exposure (including on and off balance exposures); what type of eligible collateral and value of collateral, with two sub-scenarios:
   1. i.With average provisioning level of similar assets, and
   2. ii.75% provisioning level
2. b)Central Bank’s Macro-Economic Stress Test
   1. •Assumptions and results of the latest Macroeconomic stress tests performed by the Central Bank.
3. 7.Non-Funding Notice: Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument.
4. Private Placements
5. •Offer letter is required for private placements, including risk factors and the bank's financial and risk situation.
6. •Market Conformity Analysis: The bank has to provide evidence on why the pricing of the instrument conforms to the market rate.

Question 1: The last bullet point mentions “Liability accounted instruments must set the loss absorption trigger at a level of 7.625%.” Is it Central Bank decision to have this trigger set at 7.625%? Are any triggers likely to be set for equity accounted instruments?
It is Central Bank’s decision for the trigger level. However, the trigger level derives directly from Basel. Minimum capital requirement plus 0.625%. Note, that the consultation documents do not consult on a trigger for equity accounted AT1. However, in particular in conjunction with the development of a recovery/ resolution regulation, the introduction of a trigger level may also be discussed again, as pointed out in the presentation that was circulated with the Tier capital instrument documents.

Question 2: Point of Non-Viability mentions that “A Point of Non-Viability means that the Regulator has determined that the issuer has or will become, Non-Viable without: (a) a Write-down; or (b) a public injection of capital (or equivalent support).”. We need clarification as to whether the PONV will be determined by the regulator or the issuer. Also, please advise under what circumstance will partial Write-down be permitted. The regulator determines whether the bank is non-viable or not. Partial write-down will be permitted only for exceptional cases. Explicit examples will not be provided to prevent any expectation.

Question 3: Appendix A: Application Process 1.4: It is mentioned that “Stress Testing with a stress scenario of top 2 customers are defaulting”. Since many UAE banks have concentrations in this area, what loss rate needs to be applied in this stress scenario?
Current status quo is two sub scenarios: 75% loss rate and average loss rate of the bank for such customers.