Consultation Paper No. 2 of 2025 - Review of Prudential Framework for Lower Risk Firms

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CONSULTATION PAPER
NO. 2 OF 2025
REVIEW OF PRUDENTIAL FRAMEWORK
FOR LOWER-RISK FIRMS
9 APRIL 2025

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Table of Contents
Introduction .........................................................................................................................3
Background..........................................................................................................................5
Section A: Proposed amendments to prudential requirements............................................6
Section B: Discussion points .............................................................................................10
Appendices........................................................................................................................12

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Why we are issuing this consultation paper

1. The Financial Services Regulatory Authority ("FSRA") of Abu Dhabi Global Market
   ("ADGM") has issued this consultation paper to invite public feedback and comments on proposed amendments to the prudential framework applicable to Authorised Persons (“firms”) in Category 3B, 3C and 4 under the FSRA’s Prudential – Investment, Insurance Intermediation and Banking Rulebook (“PRU”), with the proposed amendments relating to capital requirements primarily affecting Category 4 firms.
2. The paper also seeks feedback to identify any other matters in relation to
   Categories 3B, 3C and 4 that have not been addressed in the current phase of the review and matters relevant to the prudential regime applicable to firms in Categories 2 and 3A, with a view to informing the next phase of the review of the relevant prudential requirements.
3. Capitalised terms contained in this consultation paper have the meanings attributed
   to them in the FSRA’s Glossary Rulebook (“GLO”) or in PRU, unless otherwise defined in this consultation paper. Who should read this consultation paper
4. This Consultation Paper should be of particular interest to Authorised Persons in
   Categories 2, 3A, 3B, 3C and 4, potential applicants intending to conduct Regulated Activities that fall within these prudential categories, other Persons undertaking similar activities, and their respective professional advisors. How to provide comments
5. All comments should be made in writing and sent to the mail address or email
   address specified below. If sending your comments by email, please put the consultation paper number in the subject line. If relevant, please identify the organisation you represent in providing your comments. The FSRA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making any comments. Comments supported by reasoning and evidence will be given more weight by the FSRA. What happens next
6. The deadline for providing comments on these proposals is 21 May 2025. When we
   receive your comments, we will consider whether any modifications to the proposals Introduction

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Confidential are required. We will then proceed to enact the proposals in their final form. You should not act on the proposals described in this consultation paper until the final rules are issued and we will issue a notice on our website when that happens. Comments to be addressed to:
Consultation Paper No. 2 of 2025
Financial Services Regulatory Authority
Abu Dhabi Global Market
ADGM Square
Al Maryah Island
PO Box 111999
Abu Dhabi, UAE
Email: fsra.consultation@adgm.com

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1. The financial services sector in ADGM has grown significantly since PRU was first
   introduced in October 2015 and the FSRA considers that it is appropriate at this stage of ADGM’s development to review its prudential framework to ensure that the requirements remain proportionate to the business models and risk profiles of its regulated firms. Origin of the FSRA’s prudential regulatory framework
2. The FSRA’s prudential regulatory framework, detailed in PRU, is largely based on an
   earlier version of the EU prudential regulatory framework for banks and investment firms (“CRR/CRD framework”). In turn, the CRR/CRD framework was derived from successive iterations of the standards developed by the BaselCommittee on Banking Supervision (“BCBS”), which were designed for well-diversified, internationally active banks and hence focussed on the risks associated with deposit taking and lending.
3. Regulators in other jurisdictions, including the EU, the UK and the DIFC, that have the
   origins of their prudential frameworks in the CRR/CRD framework/Basel standards have subsequently recognised that applying a prudential framework designed for such banks to other regulated firms may be disproportionate to the business model and risk profile of such firms, and have adjusted their prudential regimes accordingly. ADGM-specific considerations
4. Since ADGM’s inception, Category 3B, 3C and 4 firms have been considered to pose
   lower prudential risk than, for example, those taking deposits. In addition, the vast majority of Category 4 firms generally do not hold Client Assets or Insurance Money, which further reduces the extent and complexity of their risk profile.
5. In formulating the proposals outlined in this paper, the FSRA has been guided by its
   supervisory experience and has also considered regulatory developments in other jurisdictions, including the prudential regime for investment firms in the EU and the equivalent in the UK.
6. The proposals in section A of this paper represent the first phase of a holistic review
   of the prudential framework for all firms and focusses on certain prudential requirements applicable to Category 3B, 3C and 4 firms. Section B of this paper seeks feedback on any other matters in relation to Categories 3B, 3C and 4 that have not been addressed in the current phase and questions relevant to the prudential regime applicable to Category 2 and 3A firms, both with a view to informing the next phase of the FSRA’s review of the relevant prudential requirements. Background

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Category 4 firms not holding Client Assets or Insurance Money
7. Currently, most Category 4 firms are subject to a Capital Requirement of the higher
of the applicable Base Capital Requirement (“BCR”) or the relevant Expenditure Based Capital Minimum (“EBCM”). Consistent with other regulatory prudential regimes that impose an expenditure or overheads-based minimum capital requirement, the EBCM is intended to act as a “proxy” for the financial resources required to wind-down a firm’s business, if necessary, in an orderly manner and so reduce any negative effects of that wind-down on its Clients, and on the broader market. This is aligned with the FSRA’s statutory mandate of securing an appropriate degree of protection for the Clients of firms and the broader market.
8. However, as the majority of Category 4 firms are not permitted to hold Client Assets
or Insurance Money, they will not typically have liabilities in relation to their Clients. Those Clients will generally be able to move their business to alternative providers relatively easily, and negative effects on the broader market will be negligible. This reduces the prudential risk profile of such firms and negates the need for a capital requirement based on winding-down. Proposal
9. Therefore, given the very limited impact that failure of such Category 4 firms would
have, it is proposed to remove the EBCM requirement for those Category 4 firms that do not hold Client Assets or Insurance Money (“in-scope Category 4 firms”), meaning that such firms would only be subject to the BCR. This proposal would not affect the EBCM for Category 4 firms that hold Client Assets or Insurance Money. Additionally, firms carrying on the Regulated Activity of Operating a Multilateral Trading Facility or an Organised Trading Facility are not affected by the proposal to remove the EBCM requirement.
10. As the BCR for most Category 4 firms is currently $10,000, it is also proposed to
increase the BCR for such firms to $50,000. This proposal would not change the BCR currently applicable to firms Providing Third Party Services ($50,000) or firms Operating a Private Financing Platform ($150,000).
11. The proposed increase in the BCR is not intended to function as a wind-down capital
requirement but rather is proposed as an appropriate minimum level of regulatory capital for in-scope Category 4 firms to hold in circumstances where the EBCM requirement would no longer apply. Beyond this minimum Capital Requirement,
Section A: Proposed amendments to prudential requirements

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Confidential firms would remain obliged under PRU 3.2.4(b) to have adequate financial resources to meet their liabilities as they fall due, including any non-client liabilities. Impact on capital adequacy
12. Supervisory data indicates that the proposed removal of the EBCM requirement and
increase to the BCR would combine to result in a significant decrease in Capital Requirement for most Category 4 firms, more appropriately reflecting the lower prudential risks inherent in them. Alongside this, as most Category 4 firms currently hold Capital Resources well in excess of their Capital Requirement, the FSRA consider that the proposed changes will not significantly impact their capital adequacy. Liquid assets
13. As we are proposing to remove the EBCM for in-scope Category 4 firms, the
requirement under the current PRU Rule 3.7.4 to hold liquid assets in excess of their EBCM would no longer apply to such firms. However, as the FSRA considers that such firms must continue to hold an appropriate portion of their balance sheet assets in liquid form, it is proposed that the liquid asset requirement for such firms would instead be in an amount that exceeds their BCR. Question 1 Do you agree with the proposal to remove the EBCM for in-scope Category 4 firms and to increase the BCR for most Category 4 firms to $50,000? Question 2 Do you have any comments on the proposal to require Category 4 firms that would not be subject to the EBCM to hold liquid assets in excess of their BCR? BCR for Providing Custody for a Fund
14. The FSRA has observed that the BCR of $4 million for Providing Custody for a Fund is
significantly higher than the BCR of $250,000 applied to Providing Custody other than for a Fund and exceeds the BCR-equivalent in benchmarked jurisdictions. Other than where a firm is Providing Custody for a Public Fund, the FSRA considers that the risk profile associated with Providing Custody for a Fund and Providing Custody other than for a Fund is similar. Proposal
15. It is therefore proposed to apply a BCR of $250,000 to the Regulated Activity of
Providing Custody, except where the firm is Providing Custody for a Public Fund. The

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FSRA considers it appropriate to retain the higher BCR of $4 million for a firm Providing Custody for a Public Fund, given that the Unitholders of such Funds are likely to include Retail Clients. Question 3 Do you agree with the proposal to apply a BCR of $250,000 to the Regulated Activity of Providing Custody for a Fund, other than a Public Fund? Internal Risk Assessment Process requirement for Category 3B and 3C firms
16. Currently, Category 3B and 3C firms are required to prepare and submit an Internal
Risk Assessment Process (“IRAP”) report to the FSRA on an annual basis and whenever there is a material change to their activities. The focus of an IRAP is on prudential risk and such firms have a low prudential risk profile, from a supervisory perspective, the FSRA no longer sees the practical value of receiving IRAP submissions from such firms. Proposal
17. Therefore, it is proposed to remove the IRAP reporting requirement for Category 3B
and 3C firms, thereby reducing the reporting burden on such firms. Where it considers it appropriate to do so, the FSRA may still use its supervisory powers to require such a firm to carry out an IRAP or to provide it with copies of the firm’s internal risk management reports and supporting documents and submit that material to it. Conduct risk considerations
18. The FSRA does note, however, that firms in these prudential categories may pose
elevated levels of conduct risk due to the nature of their ongoing interaction with their Clients and assets, and it will continue to consider how best to identify and mitigate such risk as part of its risk-based supervisory approach, whether through reporting or other means. Question 4 Do you agree with the proposal to remove the IRAP reporting requirement for Category 3B and 3C firms? Removing the requirement for professional indemnity insurance (PII) for Branches
19. Currently, all Category 3B, 3C and 4 firms, including Branches, are required to take
out and maintain PII. PII is intended to address professional liability risk, i.e., liability

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20. It is proposed that Branches should not be subject to the PII requirement, as they are
not subject to specific prudential capital requirements under PRU and are reliant on their respective head offices for financial support. Question 5 Do you agree with the proposal to remove the PII requirement for Branches of Category 3B, 3C and 4 firms? Minimum standards for PII
21. The FSRA currently requires the PII cover taken out by a firm to be “appropriate to the
nature, size, complexity and risk profile of the Authorised Person's business” and has outlined certain expectations in guidance relating to such cover, e.g., that it be taken out from a reputable and well-capitalised insurer. However, based on supervisory experience and benchmarking analysis, the FSRA considers that it would be appropriate to prescribe minimum standards for PII to ensure that it provides meaningful protection in respect of professional liability risk. Proposal
22. Based on insights gained from experience and benchmarking, the following minimum
standards are proposed:
(i) the insurer must be a regulated insurance firm, which has an external credit assessment from an ECAI that maps to Credit Quality Grade 3 or better; and (ii) the insurance policy must make provision for the following:
(a) continuous cover for claims arising from work carried out from the date on which the firm was authorised; (b) appropriate cover in respect of legal defence costs; and (c) cover in relation to claims for which the firm may be liable as a result of its conduct or the conduct of its Employees, the members of its Governing Body and its agents.
23. At this stage, the FSRA is not proposing to impose specific minimum coverage limits
and restrictions on deductible amounts, given the range of Regulated Activities

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24. It is also proposed to revise the obligation outlined in PRU 6.12.2(b) where we
currently require firms to provide the FSRA with a copy of the firm’s PII cover on an annual basis. Instead, we propose to require the firm to submit to the FSRA a confirmation statement, approved by its Governing Body, which verifies that the PII cover meets the prescribed minimum standards. Question 6 Do you have any comments on the minimum standards proposed for PII and the proposed change in the reporting obligation to the FSRA? Miscellaneous amendments Proposals
25. The FSRA also proposes a range of miscellaneous amendments to PRU including the
following, alongside correcting typos and errata.

• BCR applicable to Authorised Fund Managers – amend PRU 3.3.2 to clarify that
  a BCR of $150,000 or $50,000 applies to an Authorised Person, where it is authorised to carry on only the Regulated Activity of Managing a Collective Investment Fund from the list of Regulated Activities under Category 3C.
• Scope of application of Chapter 10 of PRU – amend it to clarify that the
  requirements outlined therein apply to Domestic Firms only and not to Branches, similarly amending App11. Question 7 Do you have any comments on the miscellaneous amendments described above or those outlined in Appendix 1?

26. In the next phase of its review, the FSRA intends to consider any other matters in
    relation to Categories 3B, 3C and 4 that have not been addressed in the current phase, along with the prudential requirements applicable to Category 2 and 3A firms.
    Section B: Discussion points

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27. For Category 2 and 3A firms, the FSRA will consider whether differentiating the
prudential requirements applicable to the Regulated Activities within each of these categories would be appropriate. In particular, while the Regulated Activities of Dealing in Investments as Agent and Dealing in Investments as Matched Principal are both currently included in Category 3A, the FSRA considers that the prudential risks associated with these Regulated Activities may differ to a meaningful degree.
28. Similarly, firms Dealing in Investments as Matched Principal are permitted to only
hold incidental and temporary positions on their balance sheet where such positions result from a failure to match Clients’ orders. As a result, such firms will not generally be subject to the same degree of prudential risk as firms Dealing in Investments as Principal on an unmatched basis but, other than the relevant BCR, they are subject in large part to the same prudential requirements.
29. Given these differences in risk profile, the FSRA welcomes comments on the key risks
and considerations that should inform its approach to the prudential regulation of firms carrying on Regulated Activities within Categories 2 and 3A and whether it should continue to apply a Risk Capital Requirement to such firms and other requirements derived from the standards issued by the BCBS for large banks. Question 8 Are there any other changes to the prudential requirements for Category 3B, 3C or 4 firms that the FSRA should consider as part of the next phase of its review? Question 9 What are the key risks and considerations that should inform the FSRA’s approach to prudential regulation of firms that are Dealing in Investments as Matched Principal? Should this Regulated Activity be further distinguished from Dealing in Investments as Principal on an unmatched basis from a prudential point of view? Question 10 What are the key risks and considerations that should inform the FSRA’s approach to prudential regulation of firms that are Dealing in Investments as Agent? Should firms carrying on this Regulated Activity be subject to a Risk Capital Requirement and other BCBS-derived requirements?

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The proposed legislative amendments are set out in the following document.

• Appendix 1 - Prudential - Investment, Insurance Intermediation and Banking
  Rulebook (PRU)
  Appendices

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Prudential – Investment, Insurance Intermediation and Banking Rulebook (PRU) *In this attachment underlining indicates new text and striking through indicates deleted text.

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…
APPLICATION TABLE A:
FOR AN AUTHORISED PERSON THAT OPERATES AS A DOMESTIC FIRM
Chapter Category 1 Category 2 Category 3A Category 3B
Category
3C Category 4 Category 5
3. Capital and
Leverage
Whole Chapter, except
Rule 3.2.2, and Sections
3.6, 3.7 and 3.20.
Whole
Chapter,
except Rule
3.2.2, and
Sections 3.6,
3.7, 3.17,
3.18, 3.19,
3.20 and
3.21.
Whole Chapter, except Rule 3.2.2 and
Sections 3.4, 3.5, 3.16, 3.17, 3.18, 3.19 and 3.21.
Whole
Chapter,
except Rule
3.2.2 and
Sections 3.6,
3.7 and 3.20.
10. Supervisory
Review and
Evaluation
Process
Whole Chapter
Whole Chapter, except
Sections 10.4 and 10.6
Whole Chapter

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APPLICATION TABLE B:
FOR AN AUTHORISED PERSON THAT OPERATES AS A BRANCH IN ADGM
Chapter Category 1 Category 2 Category 3A Category 3B
Category
3C Category 4 Category 5
6. Operational Risk Whole Chapter, except Sections 6.11 and
6.12
Whole Chapter, except Sections 6.10 and,
6.11 and 6.12
Whole
Chapter,
except
Sections
6.11 and
6.12
…

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1.2 Glossary
1.2.1 The following terms and abbreviations bear the following meanings for the
purpose of these Rules.
Accounting Records Means records and underlying documents comprising initial and other accounting entries and associated supporting documents such as:
(a) cheques;
(b) records of electronic fund transfers;
(c) invoices;
(d) contracts;
(e) the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in journal entries; and (f) work sheets and spread sheets supporting cost allocations, computations, reconciliations and disclosures. Bank Means a Credit Institution. By Way of Business A Person carries on an activity specified in these Rules by way of business only if he carries on that activity from a permanent place of business maintained by him in ADGM and:
(a) engages in that activity in a manner which constitutes the carrying on of a business by him; (b) holds himself out as willing and able to engage in that activity; or (c) regularly solicits other Persons to engage with him in transactions constituting that activity. Constitution Means in relation to a Fund:
(a) which is in the form of a Body Corporate, the instrument of incorporation; (b) which is in the form of an Investment Trust, the trust deed; (c) which is in the form of a Partnership, the partnership deed; or

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(d) adopting a form other than one specified in paragraphs (a) to (c) of this definition, an instrument creating the legal form of the Fund to which the Fund Manager is a party setting out provisions relating to any aspect of the operation or management of the Fund. Financial Institution Means:
(a) an Authorised Person; or
(b) any Person which carries out as its principal business an activity which would, if carried out in ADGM, be a Regulated Activity; and (c) is not one of the following:
(i) a governmental organisation, including the central bank of any state; or (ii) a multilateral development bank. Has the meaning given in section 258 of FSMR. Financial Services Permission A permission given, or having effect as if so given, by the Regulator in accordance with Part 4 of the Financial Services and Markets Regulations Has the meaning given in section 258 of FSMR. Fund Means a Collective Investment Fund Has the meaning given in section 258 of FSMR. Fund Manager Means a Person responsible for the management of the property held for or within a Fund and who otherwise operates the Fund Has the meaning given in section 258 of FSMR. Fund Property The property held for or within a Fund Has the meaning given in section 258 of FSMR. Holding Company Has the meaning given in the Companies Regulations section 258 of FSMR. Home State Regulator Means the relevant Regulated Activities financial services regulator of a Branch in its home member state. Investment Business The business of:

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(a) Dealing in Investments as Principal;
(b) Dealing in Investments as Agent;
(c) Arranging Credit;
(d) Arranging Deals in Investments;
(e) Managing Assets;
(f) Advising on Investments or Credit;
(g) Operating a Collective Investment Fund; (h) Providing Custody; (i) Arranging Custody; (j) Managing a Profit Sharing Investment Account; or (k) Acting as the Trustee of an Investment Trust. Has the meaning given in GLO. Investment Trust Means an express trust created solely for collective investment purposes under Has the meaning given in section 114258 of FSMR. Islamic Financial Business Any part of the financial business of an Authorised Person or Recognised Body which is carried out in accordance with Shari'a Has the meaning given in section 258 of FSMR. Issuer In relation to:
(a) any Security other than a Unit in a Collective Investment Fund, means the Person by whom it is or is to be issued; (b) a Unit in a Collective Investment Fund, means the Fund Manager; and (c) an interest in a Limited Liability Partnership, means the Partnership. Has the meaning given in section 258 of FSMR. Operating a Collective Investment Fund (1) Means:
(a) being legally accountable to the Unitholders in the Fund for the management of the property held for or within a Fund under the Fund's Constitution; and

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(b) establishing, managing or otherwise operating or winding up a Collective Investment Fund. (2) To the extent that any activity under (1) constitutes Managing Assets, Acting as the Administrator of a Collective Investment Fund, Dealing in Investments as Agent, Dealing in Investments as Principal, Arranging Credit, Arranging Deals in Investments, or Providing Custody, such a Regulated Activity is taken to be incorporated within Managing a Collective Investment Fund. (3) The Person referred to in (1) is a Fund Manager. OTC Derivative or OTC Derivative Contract Means a Derivative Contract the execution of which does not take place on a Recognised Investment Exchange Has the meaning given in section 258 of FSMR. Recognised Body Means a Recognised Investment Exchange or a Recognised Clearing House Has the meaning given in section 258 of FSMR. Recognised Clearing House Means a clearing house which provides Clearing Services in the ADGM in relation to which a recognition order is in force under Part 12 Has the meaning given in section 258 of FSMR. Recognised Investment Exchange Means an investment exchange in relation to which a recognition order is in force under Part 12 Has the meaning given in section 258 of FSMR. Regulated Activity Has the meaning given in section 258 of FSMR. An activity constitutes a Regulated Activity under these Rules where:
(1) It is one of the activities below:
(a) Accepting Deposits;
(b) Providing Credit;
(c) Providing Money Services;
(d) Dealing in Investments as Principal;
(e) Dealing in Investments as Agent;

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(f) Arranging Credit;
(g) Arranging Deals in Investments;
(h) Managing Assets;
(i) Advising on Investments or Credit;
(j) Managing a Collective Investment Fund;
(k) Providing Custody;
(l) Arranging Custody;
(m) Effecting Contracts of Insurance;
(n) Carrying Out Contracts of Insurance as Principal; (o) Insurance Intermediation; (p) Insurance Management; (q) Managing a Profit Sharing Investment Account; (r) Acting as the Administrator of a Collective Investment Fund; (s) Acting as the Trustee of an Investment Trust; (t) Operating a Representative Office; (u) Operating a Credit Rating Agency; (v) Administering a Specified Benchmark; (w) Operating a Multilateral Trading Facility or Organised Trading Facility; (x) Providing Information in Relation to a Specified Benchmark; and (y) Shari’a-compliant Regulated Activities; and (2) Such activity prescribed in (1) is carried on By Way of Business. Regulator MeansHas the regulator of Regulated Activities in ADGM meaning given in section 258 of FSMR.

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Trust Administration
Services
The provision of Trust Administration Services include:
(a) the keeping of Accounting Records relating to an express trust and the preparation of trust accounts; (b) the preparation of trust instruments or other documents relating to an express trust; (c) the management and administration of trust assets subject to an express trust; (d) dealing with trust assets subject to an express trust, including the investment, transfer and disposal of such assets; (e) the distribution of trust assets subject to an express trust; and (f) the payment of expenses or remuneration out of an express trust. … Category 3B
1.3.4 An Authorised Person is in Category 3B if:
(a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of:
(i) Providing Custody (where it does so for a Public Fund); or (ii) Acting as the Trustee of an Investment Trust; and (b) it does not meet the criteria of Categories 1, 2, 3A or 5. Guidance A Category 3B Authorised Person may be authorised to conduct other Regulated Activities, but it is the authorisation for Providing Custody for a Public Fund or Acting as Trustee of a Fund, and the absence of authorisation for the activities specified in Rules 1.3.1, 1.3.2 and
1.3.3 that are determinative of its belonging to Category 3B.
Category 3C
1.3.5 An Authorised Person is in Category 3C if:

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(a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of:
(i) Managing Assets;
(ii) Managing a Collective Investment Fund; (iii) Providing Custody (where it does so other than for a Public Fund); (iv) Managing a Profit Sharing Investment Account which is a PSIAr; (v) Providing Trust Services (where it is acting as trustee in respect of at least one express trust); (vi) Providing Money Services; or (vii) Issuing a Fiat-Referenced Token; and (b) it does not meet the criteria of Categories 1, 2, 3A, 3B or 5. Guidance A Category 3C Authorised Person may be authorised to conduct other Regulated Activities, but it is the authorisation for Managing Assets, Managing a Collective Investment Fund, Providing Custody other than for a Public Fund or Managing a Profit Sharing Investment Account which is a PSIAr, Providing Trust Services (where it is acting as a trustee in respect of at least one express trust) or Providing Money Services, and the absence of authorisation for the activities specified in Rules 1.3.1, 1.3.2, 1.3.3 and 1.3.4 that are determinative of its belonging to Category 3C. Category 4
1.3.6 An Authorised Person is in Category 4 if:
(a) its Financial Services Permission authorises it to carry on one or more of the Regulated Activities of:
(i) Arranging Credit;
(ii) Arranging Deals in Investments;
(iii) Advising on Investments or Credit;
(iv) Arranging Custody;
(v) Insurance Intermediation;
(vi) Providing Trust Services (where it is not acting as trustee in respect of an express trust);

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(vii) Insurance Management;
(viii) Acting as the Administrator of a Collective Investment Fund; (ix) Operating a Multilateral Trading Facility or Organised Trading Facility, ; (x) Operating a Private Financing Platform; or (xi) Providing Third Party Services; and (b) it does not meet the criteria of Categories 1, 2, 3A, 3B, 3C or 5. …

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3 CAPITAL AND LEVERAGE
Guidance

1. This Chapter deals with all aspects of prudential requirements relating to the capital
   adequacy of Authorised Persons, in terms of both quantity and quality, and, where appropriate, the maintenance of liquid assets. (Chapter 9 covers more generally the related prudential topic of liquidity, the ability of an Authorised Person to meet its financial obligations as they fall due.) The Chapter outlines the minimum capital requirements that an Authorised Person should meet, consistent with Pillar 1 of the Basel Accord, and aims to ensure that an Authorised Person maintains adequate capital resources to support the risks associated with its activities and that it can fully absorb unexpected losses at any time. A summary of the minimum capital requirements is given in App 3.2.
2. This Chapter also includes provisions forming part of the framework for the
   assessment by the Regulator, under Pillar 2 of the Basel Accord, of the capital adequacy of an Authorised Person, with further detail given in Chapter 10. The disclosure requirements placed upon an Authorised Person under Pillar 3 of the Basel Accord are covered in Chapter 11.
3. Part 1 of this Chapter sets out the application provisions. Part 2 of this Chapter
   outlines the fundamental capital adequacy obligations and the systems and controls requirements to ensure compliance with this critical regulatory obligation.
   Part 3 of this Chapter and the related App4 include the Rules and associated
   guidance for the calculation of minimum Capital Requirement for different Categories of Authorised Persons. Additionally, this Part also includes requirements for the maintenance of liquid assets by firms subject to the Expenditure Based Capital Minimum Authorised Persons in Category 3B, 3C and 4 . Part 4 of this
   Chapter specifies detailed Rules on the calculation of Capital Resources of an
   Authorised Person, including detailed Rules on the eligibility criteria for different components of Capital Resources which correspond to varying levels of quality. This part also specifies the requirements in respect of the Capital Conservation Buffer and associated obligations. …
   3.3.2 The table below sets out the Base Capital Requirement for each Category of Authorised
   Persons.
   Category Base Capital Requirement (US $)
   3C
   250,000, except where an Authorised Person has a Financial Services Permission:
   a) the only Regulated Activity referred to in Rule 1.3.5(a) that the Authorised Person is authorised to carry out is only to carry out

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Category Base Capital Requirement (US $) the Regulated Activity of Managing a Collective Investment Fund, in which case the Base Capital Requirement is:
i) 150,000 if the Authorised Person manages a Public Fund or any other type of fund that is available to retail customers; or ii) 50,000 if the Authorised Person manages a Fund other than those specified in i); or b) an Authorised Person has a Financial Services Permission to carry out the Regulated Activity of Issuing a Fiat-Referenced Token, in which case it is 2 million. 10,00050,000, except where an Authorised Person has a Financial Services Permission:
a) to carry out the Regulated Activity of Operating a Private Financing Platform and holds Client Assets, in which case the Base Capital Requirement is 150,000; or. b) to carry out the Regulated Activity of Providing Third Party Services, in which case the Base Capital Requirement will be 50,000. …
3.6.2 Subject to Section 3.6A, the Capital Requirement for such an Authorised Person is
calculated as the higher of:
(a) the applicable Base Capital Requirement as set out in Section 3.3; or (b) the Expenditure Based Capital Minimum as set out in Section 3.7, where applicable. Guidance

1. Section 3.6A specifies the Capital Requirements for Authorised Persons
   undertaking the Regulated Activity of Providing Money Services.
2. The Expenditure Based Capital Minimum is a component of the calculation of the
   Capital Requirement under Section 3.6 and is relevant in determining whether the Regulator has to be notified under Rule 3.20.2. Authorised Persons should note the obligation to notify the Regulator under Rule 3.20.2 if their Capital Resources fall below 120% of their Capital Requirement.

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…
3.7 Expenditure Based Capital Minimum
3.7.1 An Authorised Person, other than one that has a Financial Services Permission to carry out
the Regulated Activity of Providing Third Party Services, must calculate its Expenditure Based Capital Minimum as:
(a) in the case of an Authorised Person in Category 3C which has issued a Fiat￾Referenced Token, one year; (b) in the case of an Authorised Person which holds Client Assets or Relevant Money or Insurance Money, 18/52nds; or (c) in the case of an Authorised Person in Category 3B or 3C which does not hold Client Assets or Relevant Money or Insurance Money, 13/52nds; or (d) in the case of an Authorised Person in Category 4, which does not hold Insurance Money or Client Assets, 6/52nds; of the Annual Audited Expenditure, calculated in accordance with Rule 3.7.2. Guidance

1. An Authorised Person is considered to be holding Relevant Money and subject to
   (ab) where it offers Payment Services alongside currency exchange or Money Remittance.
2. An Authorised Person undertaking only one or both of currency exchange and Money
   Remittance to its customers, but not Payment Services, is considered not to hold Client Assets, in the form of Client Money, or Relevant Money and (bc) applies. … 3.7A Liquid assets 3.7A.14 (1) This Section applies to an Authorised Person in Category 3B, 3C or 4. An Authorised Person to which this Section applies must maintain, at all times, an amount of assets which exceeds its Expenditure Based Capital MinimumRequirement in the form of liquid assets. (2) For the purpose of this Rule, and subject to (3), liquid assets comprise any of the following:
   (a) cash in hand;
   (b) Money deposited with a regulated bank or deposit-taker where that entity has a Credit Grade Quality of II or better in the short-term rating category, or a Credit Grade Quality of 3 or better in the long-term rating category;

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(c) demand Deposits with a tenor of one year or less with a bank or deposit￾taker meeting the condition in (b) in relation to Credit Quality Grade; (d) time Deposits with a tenor of one year or less which have an option to redeem the Deposit at any time. In such cases, the Deposit amount eligible to be included as liquid assets must be calculated as net of any costs associated with such early redemption; (e) cash receivable from a regulated clearing house and cash Deposits with such clearing houses, other than any fees or contributions to guarantee or reserve funds of such clearing houses; or (f) any other asset which may be approved by the Regulator as comprising a liquid asset for the purpose of this Rule. (3) For the purpose of this Rule, liquid assets do not include:
(a) any Investment, asset or Deposit which has been pledged as security or Collateral for any obligations or liabilities assumed by it or by any other third party; or (b) cash held in Client Money, Relevant Money or Insurance Money accounts. …
3.17 Capital Conservation Buffer
3.17.1 This Section applies to an Authorised Person in Category 1, 2, or 5.
3.17.2 Where, pursuant to Section 3.4, the Risk Capital Requirement forms the Capital
Requirement of an Authorised Person, then that this Section applies, an Authorised Person is subject to a Capital Conservation Buffer requirement. …
3.18 Countercyclical Capital Buffer
3.18.1 This Section applies to an Authorised Person in Category 1, 2 or 5.
3.18.2 Where, pursuant to this Section 3.4, the Risk Capital Requirement forms the Capital
Requirement ofapplies, an Authorised Person, then it is subject to a Countercyclical Capital Buffer requirement. …
3.19 Combined Buffer
3.19.1 The Combined Buffer is the sum of the Capital Conservation Buffer and the Countercyclical
Capital Buffer.

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3.19.2 An Authorised Person in Category 1, 2 or 5 must not use CET1 Capital that is held to meet
the Combined Buffer Requirement to meet:
(a) its Capital Requirement;
(b) any Individual Capital Requirement that may be imposed pursuant to Chapter 10; or (c) any other buffer, where applicable. … Credit Derivatives
4.13.11 (1) An Authorised Person may recognise the effects of CRM of a Credit Derivative only
if it is provided by any of the following entities:
(a) central government or central banks;
(b) the MDBs referred to in Rules 4.12.7 to 4.12.8 ; (c) the international organisations referred to in Rule 4.12.9; (d) PSE; …
6.11 Operational Risk Capital Requirement
6.11.1 This Section applies to an Authorised Person that is a Domestic Firm in Category 1, 2, 3A or
5.
…
6.12 Professional indemnity insurance
6.12.1 This Section applies to an Authorised Person that is a Domestic Firm in Category 3B, 3C or
4.
6.12.2 An Authorised Person must:
(a) subject to Rule 6.12A, take out and maintain professional indemnity insurance cover appropriate to the nature, size, complexity and risk profile of the Authorised Person's business;, and which meets the following minimum standards:
(i) the cover is provided by an Insurer or a Regulated Financial Institution that is authorised to provide professional indemnity insurance, and which has an external credit assessment from an ECAI that maps to Credit Quality Grade 3 or better; (ii) the contract incorporates terms that make provision for:

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(A) claims arising from work carried out from the date on which the Authorised Person was authorised; (B) appropriate cover in respect of legal defence costs; and (C) cover in relation to claims for which the Authorised Person may be liable as a result of its conduct or the conduct of its Employees, the members of its Governing Body and its agents. (b) at least annually, provide the Regulator with a copy of thestatement approved by its Governing Body which confirms that the Authorised Person has professional indemnity insurance cover in (a) coveringplace forthe following 12 month period and be able to demonstrate its adequacy in relation to the nature, size, complexity and risk profile of the Authorised Person’s business, which meets the requirements in (a) ; and (c) notify the Regulator of any material changes to the cover in (a), including the level of cover, its renewal or termination. Guidance

1. In complying with Rule 6.12.2,Where it considers it appropriate to do so, the
   Regulator may require an Authorised Person should take out and maintain a contract forto provide it with a copy of its professional indemnity insurance (PII) from a reputable and well-capitalised Insurer and such contract should include cover in respect of claims for which the Authorised Person may be liable as a result of the conduct of itself and its Employees and appropriate cover in respect of legal costs arising from a claim.cover.
2. Pursuant to Rule 6.4.16.12.2(c), an Authorised Person should notify the Regulator of
   any significant PII claim made. What amounts to a significant claim will depend on the nature size and complexity of the Authorised Person and the Regulator would expect the Authorised Person to treat a series of small single claims which are significant in aggregate as significant for the purposes of Rule 6.4.1(c).
3. An Authorised Person can fulfil the requirements under this Section by ensuring
   coverage of its activities under a group-wide PII policy, provided that policy covers the Authorised Person and its activities and that policy meets the conditions specified in this Section. Where the Authorised Person's group PII cover does not meet the requirements specified under this Section, the Authorised Person will be required to obtain PII cover that meets those requirements. …

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10 SUPERVISORY REVIEW AND EVALUATION PROCESS Introduction Guidance
1. This Chapter deals with the regulatory requirements arising out of the need for
Authorised Persons to carry out a self-assessment of their risks they face, which can be reviewed and assessed by the Regulator. This Chapter details the Rules stipulating the need to complete internal risk assessments by Authorised Persons in defined frequencies and the Regulator's role in reviewing the results of such assessments. In the case of Authorised Persons facing financial risks, the requirements in this Chapter mandate completion of an Internal Capital Adequacy Assessment Process. The Regulator will review the results of such internal risk assessments. This Chapter also sets out how the Regulator may impose an additional Capital Requirement on a firm-specific basis in addition to the minimum requirement specified in Chapter 3 of these Rules to address higher-than-normal risk.
2. Where the Regulator considers it appropriate to do so, it may use its supervisory
powers to require Authorised Persons not referred to in Rule 10.1.1(a) to carry out an internal risk assessment equivalent to that specified in this Chapter and to submit such assessment to the Regulator or to provide it with copies of the Authorised Person’s internal risk management documents.
23. App11 provides detailed guidance on the various components of the Supervisory
Review and Evaluation Process and explains the role of the different parties in completing the required processes.
10.1 Application
10.1.1 This Chapter applies to an Authorised Person that is a Domestic Firm in Category 1, 2, 3A, 3B,
3C or 5 as follows:.
(a) Sections 10.1, 10.2, 10.3 and 10.5 apply only to an Authorised Person in Category 1, 2, 3A, 3B, 3C or 5; and (b) Sections 10.4 and 10.6 apply only to an Authorised Person in Category 1, 2, 3A or 5. …
10.2 Overview
Guidance
1. These Rules are designed to implement key aspects of Pillar 2 of the revised
framework offor capital adequacy, commonly known as Basel III, published by the BCBS.

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Internal Risk Assessment Process (IRAP)
2. An Authorised Person that is a Domestic Firm in Category 1, 2, 3A, 3B, 3C or 5 is
required to carry out an IRAP as detailed in Section 10.3, which is proportionate to the nature, size and complexity of its business activities and risk profile. An IRAP is a comprehensive internal risk evaluation as detailed in Section 10.3. More detail on the establishment of an IRAP and the manner of carrying out an IRAP assessment is provided in App11. Internal Capital Adequacy Assessment Process (ICAAP)
3. An Authorised Person that is a Domestic Firm in Category 1, 2, 3A or 5 is also
required to carry out an ICAAP as detailed in Section 10.4, which is proportionate to the nature, size and complexity of its business activities and risk profile. This process enables such an Authorised Person to determine and maintain an adequate amount and quality of Capital Resources, relative to its risk profile. More detail on the establishment of an ICAAP and the manner of carrying out an ICAAP assessment is provided in App11. …
10.3 IRAP
10.3.1 This Section applies to an Authorised Person that is a Domestic Firm in Category 1, 2, 3A,
3B, 3C or 5.
…
10.4 ICAAP
10.4.1 This Section applies to an Authorised Person that is a Domestic Firm in Category 1, 2, 3A or
5.
…
10.5 SREP
Guidance

1. The Regulator may conduct a SREP to review and evaluate the assessments carried
   out by an Authorised Person under its IRAP (relevant to firms in Categories 1, 2, 3A, 3B, 3C and 5) and ICAAP (relevant to firmsAuthorised Persons that are Domestic Firms in Categories 1, 2, 3A and 5). Section A11.3 of App11 contains guidance in relation to a SREP.
2. The Regulator may engage with a firm in Categories 1, 2, 3A and 5 in a dialogue
   where, following an SREP, the Regulator considers that it is or may be appropriate to impose an Individual Capital Requirement on the firm.

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3. It is important that a firm cooperates in an open and co-operative manner with the
Regulator in the course of its conduct of the dialogue.
10.6 Imposition of an Individual Capital Requirement
10.6.1 (1) This Section applies to an Authorised Person that is a Domestic Firm in Category 1,
2, 3A or 5.
(2) The Regulator may, subject to (3) and (4), at any time by written notice to an Authorised Person:
(a) impose an Individual Capital Requirement; or (b) vary or withdraw an Individual Capital Requirement. (3) The Regulator may act under (2) on its own initiative where the Regulator forms the view that the Capital Requirement of the Authorised Person is insufficient to address adequately all its risks. (4) The Regulator will, where prescribing an Individual Capital Requirement, also specify in the notice the types and amounts of Capital Resources required to meet the Individual Capital Requirement. (5) If the Regulator decides to exercise its power under (2) after a Financial Services Permission has been granted, the Authorised Person may refer the matter to the Court for review. …

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APP1 CATEGORIES OF AUTHORISED PERSONS
…
Category 1 Category 2 Category 3A Category 3B Category 3C Category 4 Category 5 Accepting Deposits Providing Credit Dealing in Investments as Principal (only as a Matched Principal) Providing Custody (only if for a Public Fund) Managing a Collective Investment Fund Arranging Credit An Islamic Financial Institution Managing a Profit Sharing Investment Account which is a PSIAu Managing a Profit Sharing Investment Account which is a PSIAu Dealing in Investments as Principal (not as Matched Principal) Dealing in Investments as Agent Acting as the Trustee of an Investment Trust Managing Assets Arranging Deals in Investments Managing a Profit Sharing Investment Account which is a PSIAr Advising on Investments or Credit Providing Custody other than for a Public Fund Arranging Custody Providing Trust Services as a trustee of an express trust Insurance Intermediation Providing Money Services Insurance Management Issuing a Fiat￾Referenced Token Acting as the Administrator of a Collective Investment Fund Operating a Multilateral Trading Facility or Organised Trading Facility Providing Trust Services other than as a trustee of an express trust Operating a Private Financing Platform Providing Third Party Services …

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A3.2 Capital Requirements
Guidance

1. This table summarises the Capital Requirement that an Authorised Person is subject to and an Authorised Person must hold
   sufficient Capital Resources at all times to meet the Capital Requirement. Capital Requirement (USD) Category <---------------------------------------------------------------------------------------maximum of---------------------------------------------------------> Base Capital Requirement 2 Expenditure Based Capital Minimum 3 Risk Capital Requirement 5 Holding Client Assets or Relevant Money 4 or Insurance Money? No Yes 1 10mn Credit, Market, Operational and CVA (plus, where appropriate, Displaced Commercial) 2 2mn Credit, Market, Operational and CVA 3A 500k 3B 6 4mn 13/52nds of Annual Audited Expenditure 18/52nds of Annual Audited Expenditure See guidance note 8 for Money Remitters 3C 6 and Payment Service Providers 250k except where an Authorised Person has a Financial Services Permission:
   a) the only Regulated
   Activity referred to in
   Rule 1.3.5(a) that the
   Authorised Person is

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i) 150,000 if the
Authorised
Person manages a
Public Fund or any other type of fund that is available to retail customers; or ii) 50,000 if the Authorised Person manages a Fund other than those specified in i); or b) an Authorised Person has a Financial Services Permission to carry out the Regulated

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Activity of Issuing a Fiat
-
Referenced Token, in which case it is 2 million.
6, 7
10k50k
/52nds of
Annual
Expendituren/ a except where an
Authorised Person has a
Financial Services
Permission
:
a) to carry out the
Regulated
Activity of
Operating a
Private Financing
Platform and holds Client
Assets, in which case the Base
Capital
Requirement is
150,000; or b)
.to carry out the Regulated
Activity of
Providing Third
Party Services, in which case the
Base Capital
Requirement will be 50,000
.

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5 10mn Credit, Market, Operational, CVA and Displaced Commercial

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A11.2 ICAAP
Guidance
Application
1. This Guidance is relevant to an Authorised Person as described in
Section 10.4 (that is, a firman Authorised Person that is a Domestic Firm in
Category 1, 2, 3A or 5) in regard to an Internal Risk Capital Adequacy Assessment Process (referred to in this Guidance as an ICAAP). … A11.3 Supervisory Review and Evaluation Process (SREP) Guidance Application
1. This Guidance is relevant to an Authorised Person as described in
Section 10.5 (that is, a firmDomestic Firm in Category 1, 2, 3A, 3B, 3C or3A or 5) in
regard to a Supervisory Review and Evaluation Process (referred to in this Guidance as a SREP). … APP12 PUBLIC DISCLOSURE REQUIREMENTS
Table 1 – Scope of application
Qualitative Disclosures (a) The name of the Authorised Person.
(b) In the case of a Financial Group, a list of all the entities forming part of the Financial Group and a brief description of each of those entities. In addition, a description of differences in the basis of consolidation for regulatory purposes compared to that required under the International Financial Reporting Standards. The description must include a brief description of the entities:
(i) that are fully consolidated;
(ii) that are consolidated on a pro-rata basis; (iv) (iii) that are equity-accounted; (v) (iv) that are included as deductions from any of the components of Capital Resources;

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(v) from which surplus capital is recognised, if any; and (vi) that are not consolidated and not deducted. (c) Any restrictions or impediments on transfer of funds or regulatory capital within the Financial Group.