Document ID: chunk:federal_register_of_legislation:F2022L01562:body:0:p60
Version: federal_register_of_legislation:F2022L01562
Segment Type: other
Provision Reference: 
Character Range: 155971–158860

Capital Adequacy: Counterparty Credit Risk).

    [24] Any gains on hedges are to be deducted and any losses on hedges added back.

    [25] Refer to footnote 22.

    [26] This excludes holdings of subordinated debt in commercial (non-financial) institutions. All other holdings of capital instruments, including preference shares, even if classified as debt, must be deducted from Common Equity Tier 1 Capital.

    [27] Includes goodwill and intangibles attributable to investments in subsidiaries, joint ventures and associates. For the purposes of this Prudential Standard, a joint operation (as defined under Australian Accounting Standard AASB 11 Joint Arrangements) is to be treated as a joint venture.

    [28] An instrument may be treated as perpetual if it will mandatorily convert to ordinary shares at a pre-defined date after 5 years from issue. Instruments with maturity dates and automatic roll-over features do not qualify as perpetual instruments.

    [29] Conversion from a fixed rate to a floating rate (or vice versa) in combination with a call option without any increase in the credit spread is not considered an incentive to redeem. However, the ADI must not otherwise do anything to create an expectation that the call will be exercised.

    [30] An instrument may not provide for investors upon non-payment of a distribution to convert an Additional Tier 1 Capital instrument, and the amount of any unpaid dividend or interest, into ordinary shares or mutual equity interests.

    [31] This includes where an ADI issues in a foreign jurisdiction.

    [32]  This does not preclude a parent entity of the ADI from holding the instrument where the instrument is directly issued by the ADI to the parent entity.

    [33] Indirect exposures represent exposures that will result in a loss to the ADI substantially equivalent to any loss in the direct holding. As an example, this would include lending to a borrower on a non-recourse basis secured against any capital instruments of the ADI or members of the group. It would exclude, for example, full recourse lending to a borrower to purchase a well-diversified and well-collateralised portfolio that may include the relevant exposures.

    [34] For example, by way of a scheme of arrangement.

    [35] No restrictions on payment of distributions, or any restrictions on redemptions or buyback of Common Equity Tier 1 Capital instruments may be applied to: (i) any existing holding company of the issuer, or (ii) any potential future holding company of the issuer, where the holding company does not undertake the role of issuer of the instrument. This includes situations where a future holding company may be substituted as the issuer of ordinary shares on conversion, but not substituted as the issuer of the instrument.

    [36] Any reference to Common Equity Tier 1 Capital instruments in this paragraph