1.1 BCBS standard
7 According to the BCBS standard, an investing bank (whether a G-SIB or a non-GSIB) must deduct its holdings of instruments issued by other G-SIBS that constitute TLAC holdings from its own Tier 2 capital. For the purpose of better limiting contagion in the banking system, the term “TLAC holdings” (also referred to as “other TLAC liabilities”) is defined under the BCBS standard to encompass all direct, indirect and synthetic holdings, not only of instruments that are actively being recognised by the issuing G-SIB as external TLAC and are not in the form of regulatory capital instruments, but also of instruments ranking pari passu with those recognised instruments that meet the subordination criteria specified under the FSB TLAC Term Sheet4. The intended coverage of other TLAC liabilities for capital deduction is illustrated at Annex. For instruments recognised as external TLAC by virtue of the exemptions to the subordination criteria set out in the antepenultimate and penultimate paragraphs of Section 11 of the FSB TLAC Term Sheet, investing banks must determine the amount of their TLAC holding based on the latest disclosure made by the G-SIB issuing the relevant instrument. The exemptions to the subordination criteria allow G-SIBs to recognise, as external TLAC, “senior” liabilities ranking pari passu with “excluded liabilities”5 and meeting the eligibility criteria for TLAC (other than subordination ) on the following bases:
(i) for G-SIBs incorporated in jurisdictions in which all excluded liabilities are statutorily excluded from the scope of the bail-in resolution tool, all liabilities ranking pari passu with such excluded liabilities can be recognised as external TLAC, provided they are included within the scope of bail-in and otherwise meet the eligibility criteria for TLAC (other than subordination); and
4 These refer to instruments that satisfy any one of the subordination criteria set out under the second paragraph or the “de minimis” criteria in the third paragraph (e.g. liabilities not exceeding 5%
of the resolution entity’s eligible external TLAC) of Section 11 of the FSB TLAC Term Sheet.
5 These are liabilities which are excluded from recognition as TLAC as specified in Section 10 of the FSB TLAC Term Sheet.
(ii) for G-SIBs incorporated in jurisdictions where the resolution authority may (under exceptional circumstances specified in the applicable resolution law) exclude, or partially exclude, all excluded liabilities from the scope of the bail-in resolution tool, a certain portion of the G-SIBs’ liabilities6, ranking pari passu alongside these excluded liabilities, may be permitted by the relevant authorities to be recognized as external TLAC.
8 Where issuing G-SIBs rely on the subordination exemptions in (i) or (ii) above in maintaining their external TLAC requirements, they must publicly disclose the relevant amount of external TLAC instruments issued thus exempted. Those applying the capped exemption described in (ii) must also disclose the percentage of their funding ranking pari passu with excluded liabilities that is eligible to be recognized as external TLAC under the exemption and the amount that is in fact being recognized as such. Where this capped exemption is used, an investing bank’s holding of the issuing G-SIB’s instruments will be subject to a proportionate deduction approach. The proportion to be deducted is calculated as (a) the amount of the issuing G-SIB’s funding that ranks pari passu with excluded liabilities and that is actually recognized by the G-SIB as external TLAC divided by (b) the total amount of the funding issued by the G-SIB that ranks pari passu with excluded liabilities and that would be recognized as external TLAC if there were no subordination criteria.
9 The BCBS standard is scheduled to take effect from 1 January 2019 for banks’
investments in G-SIBs’ external TLAC except for those G-SIBs whose headquarters are in Emerging Market Economies (“EME”) as referred to in Section 21 of the FSB requirement under the Term Sheet calculated by reference to its RWA is 16% and up to 3.5% RWA when the TLAC RWA minimum is 18%.
7 Section 21 of the FSB TLAC Term Sheet provides for G-SIBs headquartered in EMEs, which are designated as G-SIBs by end-2015, to conform with minimum TLAC requirements beginning from 1 January 2025. This may, however, be accelerated depending upon developments in an EME’s debt markets.
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1.2 Proposed approach for local implementation
10 Reflecting the current local scope of application of the Basel III capital framework generally, it is proposed that “investing AIs” (i.e. those whose TLAC holdings are proposed to be deducted under the amendments to be made to the Banking (Capital) Rules (“BCR”)) should encompass all locally-incorporated AIs, viz., not only those that are internationally active, and including those that are subsidiaries of G-SIBs incorporated in EMEs.
11 As to what should constitute “TLAC holdings” for the purposes of deduction under the BCR, it is proposed that not only “other TLAC liabilities” issued by G-SIBs, but also those issued by the following entities, should be subject to deduction:
(i) any locally-incorporated institution (whether an AI or not) as soon as it is classified by the Monetary Authority (“MA”) as a resolution entity under the AI LAC Rules8 (and hence may need to issue LAC instruments, which would be expected to include other TLAC liabilities, to satisfy its external LAC requirements even before the requirements under the AI LAC Rules become effective)9 (in which case “other TLAC liabilities” will be those instruments that do not constitute or otherwise take the form of regulatory capital but that are eligible for recognition as external LAC under the AI LAC Rules); and
(ii) any overseas-incorporated institution which is not a G-SIB but which is classified as required to be subject to an external TLAC requirement imposed by a relevant competent authority (in which case “other TLAC liabilities” will be those non-regulatory capital instruments permitted by the relevant competent authority to be recognised as external TLAC in its jurisdiction, having regard to any exemption from subordination criteria (as described in paragraph 7(i) and (ii) above) adopted by the relevant jurisdiction in respect of instruments issued by non-G-SIB resolution entities).
8 As discussed in footnote 19 of CP 18.01, a locally incorporated resolution entity will be an AI, a holding company of an AI or an affiliated operational entity of an AI.
9 See CP 18.01 Section III for a discussion of the classification of entities as resolution entities.