MIFIDPRU 3.3 Common equity tier 1 capital

1. (1)

   1A firm must determine its common equity tier 1 capital in accordance with Chapter 2 of Title I of Part Two of the UK CRR, as modified by the rules in this section.

2. (2)

   Any reference to the UK CRR in this section is to the UK CRR as applied by (1) and modified by the rules in this section.

2Article 34 of the UK CRR (Additional valuation adjustments) applies only in relation to positions held in a firm’s trading book.

1To apply for permission to include interim or year-end profits in its common equity tier 1 capital before the firm has taken a formal decision confirming the final profit or loss for the year in accordance with article 26(2) of the UK CRR, a firm must complete the form in MIFIDPRU 3 Annex 1R and submit it to the FCA using the online notification and application system.

1. (1)

   1To apply for permission to classify an issuance of capital instruments as common equity tier 1 capital in accordance with article 26(3) of the UK CRR, a firm must complete the form in MIFIDPRU 3 Annex 2R and submit it to the FCA using the online notification and application system.

2. (2)

   To notify the FCA in accordance with article 26(3) subparagraph two of the UK CRR about subsequent issuances of capital instruments for which it has already received the permission in (1), a firm must complete the form in MIFIDPRU 3 Annex 3R and submit it to the FCA using the online notification and application system.

2When determining whether there is a close correspondence between the value of a firm’s covered bonds and the value of the firm’s assets for the purposes of article 33(3)(c) of the UK CRR, the Covered Bonds RTS applies with the following modifications:

1. (1)

   any reference to an “institution” is a reference to the firm; and

2. (2)

   any reference to “Regulation (EU) No 575/2013” is a reference to the UK CRR as applied and modified by the rules in MIFIDPRU.

1For the purposes of MIFIDPRU:

1. (1)

   MIFIDPRU 3.3.6R replaces article 36 of the UK CRR; and

2. (2)

   any reference to article 36 of the UK CRR or any part of that article in the following is a reference to MIFIDPRU 3.3.6R (or the equivalent part of it):

   1. (a)

      another provision of the UK CRR that is incorporated by reference into MIFIDPRU; or

   2. (b)

      any technical standard that applies to a MIFIDPRU investment firm under a provision of the UK CRR to which (a) applies.

1A MIFIDPRU investment firm must deduct the following from its common equity tier 1 items:

1. (1)

   losses for the current financial year;

2. (2)

   intangible assets;

3. (3)

   deferred tax assets that rely on future profitability;

4. (4)

   the value of any defined benefit pension fund assets on the balance sheet of the firm after deducting the amount of any associated deferred tax liability where that liability would be extinguished if the assets became impaired or were derecognised under the applicable accounting framework;

5. (5)

   direct, indirect and synthetic holdings by the firm of its own common equity tier 1 instruments, including own common equity tier 1 instruments that the firm is under an actual or contingent obligation to purchase by virtue of an existing contractual obligation;

6. (6)

   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 firm that the FCA considers has been designed to inflate artificially the own funds of the firm;

7. (7)

   direct, indirect and synthetic holdings by the firm of common equity tier 1 instruments of financial sector entities where the firm does not have a significant investment in those entities;

8. (8)

   direct, indirect and synthetic holdings by the firm of the common equity tier 1 instruments of financial sector entities where the firm has a significant investment in those entities;

9. (9)

   the amount of items required to be deducted from additional tier 1 items under article 56 of the UK CRR that exceeds the additional tier 1 items of the firm; and

10. (10)

    any tax charge relating to common equity tier 1 items foreseeable at the moment of its calculation, except where the firm 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.

11. (11)

    where a firm is a partnership or a limited liability partnership, the amount by which the aggregate of any amounts withdrawn by its partners or members exceeds the profits of the firm, except to the extent that the amount:

    1. (a)

       has already been deducted from the firm’s own funds as a loss under (1);

    2. (b)

       was repaid in accordance with MIFIDPRU 3.3.16R(2) or MIFIDPRU 3.3.17R(2); or

    3. (c)

       is already reflected in a reduction of the firm’s own funds that was permitted under articles 77 and 78 of the UK CRR, as applied in accordance with MIFIDPRU 3.6 (General requirements for own funds instruments).

1. (1)

   1For the purposes of MIFIDPRU 3.3.6R and MIFIDPRU 3.3.15R, holdings in a fund are to be treated as holdings in a non-financial sector entity.

2. (2)

   The requirement in (1) does not affect the meaning of the terms “financial sector entity” or “non-financial sector entity” when used in any other context in the Handbook.

1A firm must deduct deferred tax assets that rely on future profitability from its common equity tier 1 items under MIFIDPRU 3.3.6R(3) without applying:

1. (1)

   article 39 of the UK CRR (tax overpayments, tax loss carry backs and deferred tax assets that do not rely on future profitability); or

2. (2)

   article 48 of the UK CRR (threshold exemptions from deduction from common equity tier 1 items).

1A firm must deduct defined benefit pension fund assets on its balance sheet from its common equity tier 1 items under MIFIDPRU 3.3.6R(4) without applying article 41 of the UK CRR (deduction of defined benefit pension fund assets).

1. (1)

   1This rule applies to a firm’s holdings of capital instruments that are not held in its trading book.

2. (2)

   Subject to MIFIDPRU 3.3.14R, a firm must deduct its direct, indirect and synthetic holdings of common equity tier 1 instruments of financial sector entities under MIFIDPRU 3.3.6R(7) without applying article 46 of the UK CRR (deduction of holdings of common equity tier 1 instruments where an institution does not have a significant investment in a financial sector entity).

1The following provisions do not apply to common equity tier 1 instruments held in the trading book of a firm:

1. (1)

   MIFIDPRU 3.3.6R(7); and

2. (2)

   article 46 of the UK CRR.

1Subject to MIFIDPRU 3.3.14R, a firm must deduct its direct, indirect and synthetic holdings in the common equity tier 1 instruments of financial sector entities under MIFIDPRU 3.3.6R(8) without applying article 48 of the UK CRR (threshold exemptions from deduction from common equity tier 1 items).

1Article 49 of the UK CRR (requirement for deduction where consolidation, supplementary supervision or institutional protection schemes are applied) does not apply for the purposes of this section.

1A firm is not required to deduct holdings of common equity tier 1 instruments issued by a financial sector entity from the firm’s common equity tier 1 items in accordance with MIFIDPRU 3.3.6R if all of the following conditions are met:

1. (1)

   the financial sector entity forms part of the same investment firm group as the firm;

2. (2)

   there is no current or foreseen material, practical or legal impediment to the prompt transfer of capital or repayment of liabilities by the financial sector entity;

3. (3)

   the investment firm group is subject to prudential consolidation under MIFIDPRU 2.5; and

4. (4)

   the risk evaluation, measurement and control procedures of a parent undertaking included within the consolidated situation of the UK parent entity of the investment firm group include the financial sector entity.

1. (1)

   1A firm must deduct from its common equity tier 1 items any amounts in excess of the following limits:

   1. (a)

      a qualifying holding in a non-financial sector entity which exceeds 15% of the firm’s own funds; and

   2. (b)

      the total of all the qualifying holdings of the firm in non-financial sector entities which exceeds 60% of the firm’sown funds.

2. (2)

   When calculating any amounts in (1), the following must not be included:

   1. (a)

      shares in non-financial sector entities where any of the following conditions is met:

      1. (i)

         the shares are held temporarily during a financial assistance operation referred to in article 79 of the UK CRR;

      2. (ii)

         the holding of the shares is an underwriting position held for five business days or fewer; or

      3. (iii)

         the shares are held in the name of the firm on behalf of others; and

   2. (b)

      shares which are not fixed financial assets under Directive 86/635/EEC UK law (as defined in article 4(1)(128B) of the UK CRR).

1A partner’s account in relation to a firm that is a partnership satisfies the conditions in article 28(1)(e) (perpetual) and article 28(1)(f) (reduction or repayment) of the UK CRR if:

1. (1)

   capital contributed by partners is paid into the account; and

2. (2)

   under the terms of the partnership agreement an amount representing capital may be withdrawn from the account by a partner (“A”), otherwise than with prior FCA consent pursuant to MIFIDPRU 3.6.2R or deemed consent under MIFIDPRU 3.6.3R,3 only if:

   1. (a)

      A ceases to be a partner and an equal amount is transferred to another partner’s account by A’s former partners or any person replacing A as their partner;

   2. (b)

      any reduction in the capital credited to A’s account is immediately offset by additional contributions of at least an equal aggregate amount to other partner accounts by one or more of A’s partners (including any person becoming a partner of A at the time that the additional contribution is made);

   3. (c)

      the partnership is wound up or dissolved; or

   4. (d)

      the firm ceases to be authorised or no longer has a Part 4A permission.

1A member’s account in relation to a firm that is a limited liability partnership will meet the conditions in article 28(1)(e) (perpetual) and article 28(1)(f) (reduction or repayment) of the UK CRR if:

1. (1)

   capital contributed by the members is paid into the account; and

2. (2)

   under the terms of the limited liability partnership agreement, an amount representing capital may be withdrawn from the account by a partner (“B”), otherwise than with prior FCA consent pursuant to MIFIDPRU 3.6.2R or deemed consent under MIFIDPRU 3.6.3R,3 only if:

   1. (a)

      B ceases to be a member and an equal amount is transferred to another member account by B’s former fellow members or any person replacing B as a member;

   2. (b)

      any reduction in the capital credited to B’s account is immediately offset by additional contributions of at least an equal aggregate amount to other member accounts by one or more of B’s fellow members (including any person becoming a fellow member of B at the time that the additional contribution is made);

   3. (c)

      the limited liability partnership is wound up or dissolved; or

   4. (d)

      the firm ceases to be authorised or no longer has a Part 4A permission.