Article 5 Write down, write up and conversion procedures

For the purpose of point (b) of Article 3 and point (d) of Article 4(2) the provisions governing Tier 2 instruments and Other Instruments shall comply with the procedures and timing laid down in paragraphs 2 to 14 for calculating the Common Equity Tier 1 capital ratio and the amounts to be written down, written up or converted. The provisions governing Additional Tier 1 instruments shall comply with the procedures laid down in paragraph 9 and point (c) of paragraph 13 in respect of amounts to be written down, written up or converted.

Where the provisions governing Tier 2 and Other Instruments require the instruments 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. (a)

   the rate of that conversion and a limit on the permitted amount of conversion;

2. (b)

   a range within which the instruments will convert into Common Equity Tier 1 instruments.

Where the provisions governing the instruments provide that their principal amount shall be written down upon the occurrence of a trigger event, the write-down shall permanently or temporarily reduce all the following:

1. (a)

   the claim of the holder of the instrument in the insolvency or liquidation of the institution;

2. (b)

   the amount to be paid in the event of the call or redemption of the instrument;

3. (c)

   the distributions made on the instrument.

Any distributions payable after a write-down shall be based on the reduced amount of the principal.

Write-down or conversion of the instruments shall, under the applicable accounting framework, generate items that qualify as Common Equity Tier 1 items.

Where the institution has established that the Common Equity Tier 1 ratio has fallen below the level that activates conversion or write-down of the instrument the management body or any other relevant body of the institution shall be required to determine without delay that a trigger event has occurred and there shall be an irrevocable obligation to write-down or convert the instrument.

The aggregate amount of 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. (a)

   the amount required to fully restore the Common Equity Tier 1 ratio of the institution to the percentage set as the trigger event in the provisions governing the instrument;

2. (b)

   the full principal amount of the instrument.

Where a trigger event occurs, institutions shall be required to do the following:

1. (a)

   inform the staff members who have been awarded the instruments as variable remuneration and the persons who continue to hold such instruments;

2. (b)

   write down the principal amount of the instruments, or convert the instruments into Common Equity Tier 1 instruments as soon as possible and within a maximum period of one month in accordance with the requirements laid down in this Article.

Where Additional Tier 1 instruments, Tier 2 instruments and Other Instruments include an identical trigger level, the principal amount shall be written down or converted on a pro rata basis to all holders of such instruments which are used for the purposes of variable remuneration.

The amount of the instrument to be written down or converted shall be subject to independent review. That review shall be completed as soon as possible and shall not create impediments for the institution to write-down or convert the instrument.

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

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

In order for the write-down of an instrument to be considered temporary, all of the following conditions shall be met:

1. (a)

   write-ups shall be based on profits after the issuer of the instrument has taken a formal decision confirming the final profits;

2. (b)

   any write-up of the instrument or payment of coupons on the reduced amount of the principal shall be operated at the full discretion of the institution subject to the constraints arising from points (c), (d) and (e) and the institution shall not be obliged to operate or accelerate a write-up under specific circumstances;

3. (c)

   a write-up shall be operated on a pro rata basis among Additional Tier 1 instruments, Tier 2 instruments and Other Instruments used for the purpose of variable remuneration that have been subject to a write-down;

4. (d)

   the maximum amount to be attributed to the sum of the write-up of Tier 2 and Other Instruments together with the payment of coupons on the reduced amount of the principal shall be equal to the profit of the institution multiplied by the amount obtained by dividing the amount determined in point (i) by the amount determined in point (ii):

   1. (i)

      the sum of the nominal amount of all Tier 2 instruments and other instruments of the institution before write-down that have been subject to a write-down;

   2. (ii)

      the sum of own funds and of the nominal amount of Other Instruments used for the purpose of variable remuneration of the institution;

5. (e)

   the sum of any write-up amounts and payments of coupons on the reduced amount of the principal shall be treated as a payment that results in a reduction of Common Equity Tier 1 and shall be subject, together with other distributions on Common Equity Tier 1 instruments, to the restrictions relating to the Maximum Distributable Amount as laid down:

6. (i)

   in rule 4.3 of the Capital Buffers Part of the PRA rulebook in the case of a PRA-authorised person;

7. (ii)

   in rule 10.4.3 of the Prudential sourcebook for Investment Firms in the case of other authorised persons;

For the purposes of point (d) of paragraph 13, the calculation shall be made at the moment when the write-up is operated.