MA(BS)3(II) Annex/P.1 (06/2019)
Annex II-A
Illustrative example to calculate the applicable amount of minority interests / Additional Tier 1 and Tier 2 capital instruments issued by consolidated bank subsidiaries and held by third parties to be recognized in CET1 capital, Additional Tier 1 capital and Tier 2 capital of an authorized institution Suppose a bank subsidiary (Bank S) issued ordinary shares, Additional Tier 1 and Tier 2 capital instruments of $90, $40 and $20 respectively, and third parties own 30% of the ordinary share, 50% of additional Tier 1 capital instruments and 75% of Tier 2 capital instruments. If Bank S has $1,000 of total risk-weighted assets, its minimum CET1, Tier 1 and total capital requirements are assumed to be $70, $85 and $105 (i.e. corresponding to a 7% CET1 capital ratio, 8.5% Tier 1 capital ratio and a 10.5% Total capital ratio) 1 respectively. Therefore, the applicable amount of minority interests is calculated as follows:
(a) (b) (c) (d) (e) (f) (g) (h)
Capital issued by
Bank S
(gross of regulatory deductions)
Capital owned by third parties
Amount of minority interests
Minimum capital ratio
Minimum capital requirement
Surplus capital of subsidiary
(net of deductions, if any)
Surplus capital of subsidiary attributable to third parties Minority interests recognized = ((a) * (b)) = (RWA * (d)) = ((a) – (e)) =((f) * (b)) = ((c) – (g)) CET1 $90 30% $27 7% $70 $20 $6 $21 AT1 $40 50% $20 $9.8 Tier 1 $130 36% $47 8.5% $85 $45 $16.2 $30.8 Tier 2 $20 75% $15 $12.7 Total capital $150 41% $62 10.5% $105 $45 $18.5 $43.5 C A B

1 The three percentage figures here are for illustrative purposes only. The exact figures to be used in reality will depend on whether Bank S is locally incorporated in Hong Kong or outside Hong Kong according to Schedule 4D of the BCR.

MA(BS)3(II) Annex/P.2 (06/2019)
In this example, by using the formula [A – (B * C)] as stipulated in paragraph 15 of the completion instructions, the amount of minority interest that can be recognized in the institution’s consolidated CET1 capital is $21 (i.e. $27 – ($20 * 30%)). Similarly, following the same formula above, the amount of Tier 1 capital instruments (including both CET1 and AT1 capital instruments) held by third parties that can be recognized in the institution’s consolidated Tier 1 capital equals to $30.8 (i.e. $47 – ($45 * 36%)). Since $21 has been recognized in the consolidated CET1 capital of the institution, only $9.8 (i.e. $30.8 - $21) of such Tier 1 capital instruments can be included in its consolidated Additional Tier 1 capital. The calculation of the applicable amount of Tier 2 capital instruments held by third parties to be included in an institution’s Tier 2 follows the same methodology as shown above.

MA(BS)3(II) Annex/P.3 (06/2019)
Deduction from
CET1 capital
Investment in own
CET1 capital instruments
[s.43(1)(l)]
Reciprocal cross holdings in
CET1 capital instruments issued by financial sector entities [s.43(1)(m)] Capital investments in connected commercial entities (in excess of AI’s 15% total capital base [s.43(1)(n)] Loans; facilities or credit exposures to connected commercial entities [s.46(1)] Direct holdings of CET1 capital instruments issued by financial sector entities that are members of the consolidation group [s.43(1)(q)] Loans, facilities or credit exposures to connected financial sector entities [s.46(2)] Insignificant LAC investments in CET1 capital instruments issued by financial sector entities not subject to section 3C consolidation [s.43(1)(o)] Loans, facilities or credit exposures to connected financial sector entities [s.46(2)] Significant LAC investments in CET1 capital instruments issued by financial sector entities not subject to section 3C consolidation [s.43(1)(p)] Loans, facilities or credit exposures to connected financial sector entities [s.46(2)] 10% concessionary threshold applied * 10% concessionary threshold applied * Deduction from AT1 capital Investment in own AT1 capital instruments [s.47(1)(a)] Reciprocal cross holdings in AT1 capital instruments issued by financial sector entities [s.47(1)(b)] Direct holdings of AT1 capital instruments issued by financial sector entities that are members of the consolidation group [s.47(1)(e) & (f)] Insignificant LAC investments in AT1 capital instruments issued by financial sector entities not subject to
section 3C consolidation
[s.47(1)(c)]
Significant LAC investments in
AT1 capital instruments issued by financial sector entities not subject to
section 3C consolidation
[s.47(1)(d)]
10% concessionary threshold applied *
Deduction from
T2 capital
Investment in own
T2 capital instruments
[s.48(1)(a)]
Reciprocal cross holdings in
T2 capital instruments issued by or non-capital LAC liabilities of financial sector entities [s.48(1)(b)] Direct holdings of T2 capital instruments issued by financial sector entities that are members of the consolidation group [s.48(1)(e) & (f)] Insignificant LAC investments in T2 capital instruments issued by or non￾capital LAC liabilities of financial sector entities not subject to
section 3C consolidation
[s.48(1)(c)]
Significant LAC investments in T2 capital instruments issued by or non￾capital LAC liabilities of financial sector entities not subject to
section 3C consolidation
[s.48(1)(d)]
For any “section 2 institution” defined under s.2(1) of Schedule 4F For any “section 3 institution” defined under s.3(1) of Schedule 4F Insignificant LAC investments in T2 capital instruments and non￾capital LAC debt liabilities that have never been designated under s.2(3)(a) of Schedule 4F Insignificant LAC investments in non-capital LAC debt liabilities that are currently designated under s.2(3)(a) of Schedule 4F Insignificant LAC investments in non-capital LAC debt liabilities that were formerly designated under s.2(3)(a) of Schedule 4F but no longer meet the conditions set out in that section Insignificant LAC investments in T2 capital investments and non-capital LAC debt liabilities that are not currently designated under s.3(2) of Schedule 4F Insignificant LAC investments in non-capital LAC debt liabilities that are currently designated under s.3(2) of
Schedule 4F
10% concessionary threshold applied *
10% concessionary threshold applied * 5% concessionary threshold applied* 5% concessionary threshold applied* Note:

• Amount not deducted
  subject to risk weighting
  Anti-avoidance provisions – may be exempted from deduction if such exposures were incurred in the ordinary course of business Solo/solo-consolidated only Annex II-B Deduction of investments in capital and non-capital LAC liabilities and loans, facilities or credit exposures from capital base

MA(BS)3(II) Annex/P.4 (06/2019)
Annex II-C
Regulatory Treatment of Expected Loss Provisions under Hong Kong Financial Reporting Standard 9 (HKFRS 9) Basel Committee on Banking Supervision (BCBS) interim standard

1. The BCBS regulatory capital standard requires banks to categorize accounting
   provisions made into general provisions (GP) and specific provisions (SP) for the purpose of capital treatment. Authorized institutions (AIs) using the standardised approach and basic approach for credit risk can include GP as Tier 2 capital up to 1.25% of credit RWAs while SP are netted off from risk-weighted exposures. For AIs using the IRB approach, the total eligible provisions (EP) (which include all accounting provisions) are compared with the regulatory measure of expected loss (EL) calculated based on predetermined parameters. Any shortfall of EP vis-a-vis EL is deducted from CET1 capital, and any excess of EP over EL is counted as Tier 2 capital up to 0.6% of credit RWAs.
2. As an interim measure for capital adequacy purposes pending the design and
   development of a longer-term solution, the BCBS issued on 29 March 2017 an interim standard on the regulatory treatment of accounting provisions2 , under which the current requirement to categorise banks’ provisions into GP and SP and their respective treatment for regulatory capital calculation (as mentioned in paragraph 1 above) will remain unchanged when the “expected loss” provisioning model under International Financial Reporting Standard 9 (IFRS 9) comes into effect from 1 January 2018. Capital treatment of expected loss provisions under the Banking (Capital) Rules (BCR)
3. To align with the expected loss provisions under the new HKFRS 9 (IFRS 9 equivalent),
   existing definitions for “collective provisions” (i.e. essentially GP) and “specific provisions” set out in section 2(1) of the BCR have been updated. The HKFRS 9 categories financial assets into three stages in terms of credit impairment. For capital calculation, impairment provisions pertaining to exposures classified under the first two stages (i.e. Stage 1 and Stage 2) will be treated as GP, and those pertaining to exposures classified under Stage 3 as SP. With respect to provisions made for purchased or originated credit-impaired financial assets under which any changes in lifetime expected credit losses will be recognized in profit or loss account as an impairment gain or loss, the HKMA regards that such provisions to be similar in nature to SP and hence will be treated as such for capital adequacy purposes. Determination of Regulatory Reserve (RR) under HKFRS 9
4. The following two-step approach should be adopted for determining whether any RR is
   required to be maintained by an AI on top of the provisions made by it under the new

2 http://www.bis.org/bcbs/publ/d401.pdf Following the issuance of the interim standard, the BCBS continues to work on the development of a final standard to reflect expected loss provisioning within the regulatory capital framework.

MA(BS)3(II) Annex/P.5 (06/2019) accounting standard (please refer to the HKMA’s consultation paper “Regulatory Treatment of Provisions under HKFRS 9” (CP 17.02)3 for details):
(a) Step 1 – calculating a benchmark regulatory provision for unidentified expected loss (benchmark) for each AI as the product of (i) a predetermined institution￾specific “target rate” of the AI and (ii) the AI’s total loans and advances (to non￾banks); (b) Step 2 – comparing the benchmark with the relevant portion of HKFRS 9 provisions made for the AI’s total loans and advances to non-banks categorised into Stage 1 and Stage 2 under HKFRS 9 which, by definition, are not credit￾impaired (i.e. they are provisions for unidentified expected loss); and (i) where the benchmark is greater than the relevant portion of HKFRS 9 provisions, the “shortfall” will continue to be earmarked from retained earnings and maintained as RR; (ii) where, on the other hand, the benchmark is equal to or smaller than relevant portion of HKFRS 9 provisions so that there is no “shortfall” or an “excess” of accounting provisions, no RR will be required.

3 The consultation paper is available at http://www.hkma.gov.hk/media/eng/doc/key-functions/banking￾stability/basel-3/CP_17_02_HKFRS9.pdf

MA(BS)3(II) Annex/P.6 (06/2019)
Annex II-D
Illustrative example to calculate the applicable amount of investments in capital instruments issued by and non-capital LAC debt liabilities of financial sector entities to be deducted from CET1 capital, Additional Tier 1 capital and Tier 2 capital Suppose Bank A (a “section 2 institution” under section 2(1) of Schedule 4F to the BCR) holds the following capital instruments issued by and non-capital LAC liabilities of financial sector entities that fall within Schedule 4F and 4G and suppose further that Bank A has CET1 capital, Additional Tier 1 (AT1) capital and Tier 2 (T2) capital of $7,000, $2,000 and $1,500 respectively as at reporting date. Investments CET1 capital instruments AT1 capital instruments T2 capital instruments Non-capital LAC liabilities (NCLAC) Total Insignificant LAC investments $650 (a) $400 (b) $300 (c) Never designated under s.2(3)(a) of
Schedule 4F
“Inv(NvDsg NCLAC")”
Currently designated under s. 2(3)(a) of
Schedule 4F
“Inv(CurDsg NCLAC)”
Formerly designated under s.2(3)(a) of
Schedule 4F
“Inv(FmDsg NCLAC)” $2,050
$200
(d)
$350
(e) $150
Significant
LAC investments
$1,200 $800 $600 $250 $2,850
Part I (insignificant LAC investments)
The applicable amount of insignificant LAC investments to be deducted from the institution’s capital base (i.e. “Excess(10% threshold)(net long)”, “Excess(5% threshold)(gross long)” and “Inv(FmDsg NCLAC)”) should be determined according to sections 1, 2 and 4 of Schedule 4F to the BCR.4 Such amounts should be derived based on the following illustration.

4
For a “section 3 institution” under section 3(1) of Schedule 4F to the BCR, such applicable amount should be determined according to sections 1, 3 and 4 of the same
Schedule.

MA(BS)3(II) Annex/P.7 (06/2019)
Steps Calculations

1. Determine the 10% and 5% concessionary threshold
   assuming the amount of regulatory deductions to be $1,000 CET1 capital before deductions

• Less: deductions
  CET1 capital after deductions5
  $7,000
  ($1,000)
  $6,000
  5% concessionary threshold:
  = $6,000 * 5%
  = $300 (f)
  10% concessionary threshold:
  = $6,000 * 10%
  = $600 (g)

2. Determine the amount of investments in NCLAC that are
   currently designated under section 2(3)(a) of Schedule 4F but are in excess of the 5% threshold (i.e. “Excess(5% threshold)(gross long)”) = ((e) – (f)) = $350 - $300 = $50 Not applicable
3. Determine the total amount of investments in capital
   instruments and NCLAC on a net long basis that will be covered by or exceed the 10% threshold Not applicable = (a) + (b) + (c) + (d) = $650 + $400 + $300 + $200 = $1,550 (h)
4. Determine the amount of investments in capital instruments
   and NCLAC that are in excess of the 10% threshold (i.e.
   “Excess(10% threshold)(net long)”
   Not applicable
   = ((h) – (g))
   = $1,550 - $600
   = $950
   4a. Apportion the amount of investments in CET1 capital instruments to be deducted from CET1 capital Not applicable = $950* ($650 / $1,550) = $398 4b. Apportion the amount of investments in AT1 capital instruments to be deducted from AT1 capital Not applicable = $950 * ($400 / $1,550) = $245

5 The CET1 capital after deductions for the calculation of the 10% and 5% threshold must take into account any deduction applied to CET1 capital due to insufficient AT1 capital and T2 capital, if any.

MA(BS)3(II) Annex/P.8 (06/2019)
4c. Apportion the amount of (i) investments in T2 capital instruments and (ii) investments in NCLAC that are neither currently designated under section 2(3)(a) of Schedule 4F nor were formerly designated (i.e. “Inv(NvDsg NCLAC")” to be deducted from T2 capital Not applicable = $950 * (($300 + $200) / $1,550) = $307 Consequently, Bank A’s holding of insignificant LAC investments in excess of 10% concessionary threshold is $950, being $1,550 minus $600. The pro-rata calculation of respective amounts subject to (i) deduction from each tier of capital, and (ii) risk-weighting in accordance with the applicable risk-weights under Part 4, 5, 6 or 8 of the BCR, as the case requires, will be as follows –
Table 1
(A)
Amount subject to deduction Amount subject to risk-weighting Total from CET1 = $950 * ($650/$1,550) = $398 = $600 * ($650/$1,550) = $252 $650 from AT1 = $950 * ($400/$1,550) = $245 = $600 * ($400/$1,550) = $155 $400 from T2 = $950 * (($300 + $200)/$1,550) = $307 = $600 * (($300 + $200)/$1,550) = $193 $500 $950 $600 $1,550

MA(BS)3(II) Annex/P.9 (06/2019)
Hence, the balance of CET1 capital, AT1 capital and T2 capital of Bank A after the deduction of insignificant LAC investments in Part I will be –
Table 2
CET1 capital AT1 capital T2 capital
Capital balance before regulatory deductions 7,000 2,000 1,500 Less: deductions (1,000) 0 0 Less: “Excess(5% threshold)(gross long)” 0 0 (50) Less: “Excess(10% threshold)(net long)” 6 (398) (245) (307) Less: “Inv(FmDsg) NCLAC” to be deducted in full 0 0 (150) Balance brought forward to Part II 5,602 1,755 993
Part II (significant LAC investments)
According to sections 1(2), (3) and (3A) of Schedule 4G to the BCR, with respect to significant LAC investments, the concessionary threshold only applies to the institution’s capital investments in the form of CET1 capital instruments. Any holdings of AT1 capital instruments and T2

6
See column (A) of Table 1.

MA(BS)3(II) Annex/P.10 (06/2019) capital instruments issued by and non-capital LAC liabilities of financial sector entities must be fully deducted from the institution’s AT1 capital or T2 capital.
Table 3
CET1 capital AT1 capital T2 capital Remarks
Balance brought down from Part I 5,602 1,755 993 See last row of Table 2 on page 9 Less: full deduction of significant LAC investments in Tier 2 capital instruments and NCLAC (850) The sum of significant LAC investments in $600 Tier 2 capital instruments and $250 NCLAC Less: full deduction of significant LAC investments in AT1 capital instruments (800) Less: significant LAC investments in CET1capital instruments subject to deduction (640) The 10% concessionary threshold for significant LAC investments in CET1 capital instruments is $560, being ($5,602 * 10%). Therefore, (i) amount of significant LAC investments in CET1 capital instruments exceeding 10% concessionary threshold and subject to deduction is ($1,200 – $560) = $640 (ii) amount of significant LAC investments in CET1 capital instruments subject to 250% risk￾weight is $560. Capital after deduction of significant LAC investments 4,962 955 143

MA(BS)3(II) Annex/P.11 (06/2019)
Annex II-E
Basel III Transitional Arrangements
Treatment of capital instruments that no longer qualify for inclusion in capital base (non-complying capital instruments) The following phase-out treatment will apply to non-complying capital instruments.

1. Non-common equity Tier 1 and Tier 2 capital instruments that do not qualify as
   Additional Tier 1 capital (i.e. failed to meet the qualifying criteria specified in Schedule 4B of the BCR) or Tier 2 capital (i.e. failed to meet the qualifying criteria specified in
   Schedule 4C of the BCR) but were included in an Authorized Institution’s (AIs) capital
   base before 1 January 2013 (collectively referred to “extant capital instruments”) may be phased out during the 10-year period beginning from 1 January 2013. Fixing the base at the nominal amount of such instruments outstanding immediately before 1 January 2013, their recognition will be capped at 90% from 1 January 2013, with the cap reducing by 10 percentage points in each subsequent year7 . For example, an AI that issued a Tier 1 extant capital instrument in August 2010 will be able to count 90 percent of the notional outstanding amount of the instrument as of 1 January 2013 during calendar year 2013, 80 percent during calendar year 2014, and so on. As of 1 January 2022, no Tier 1 extant capital instruments will be recognized in Tier 1 capital. Progressive phasing out of non-complying capital instruments Commencement date Percentage of base amount of transitional instruments that may be included in Additional Tier 1 and Tier 2 capital under the phase-out arrangement 1 January 2013 90% 1 January 2014 80% 1 January 2015 70% 1 January 2016 60% 1 January 2017 50% 1 January 2018 40% 1 January 2019 30% 1 January 2020 20% 1 January 2021 10% 1 January 2022 0%
2. This progressively reducing cap will be applied to Additional Tier 1 capital and Tier 2
   capital separately based on the aggregate amount of extant capital instruments

7 The level of the base is fixed on 1 January 2013 and does not change thereafter.

MA(BS)3(II) Annex/P.12 (06/2019) outstanding in each tier8 . To the extent that an instrument is redeemed, or its recognition in capital is amortized, after 1 January 2013, the nominal amount serving as the base is not reduced. In addition, instruments may only be included under a particular cap to the extent that they are recognized in that tier of capital. That is to say, any amount of instruments issued in excess of the limits allowed for recognition prior to 1 January 2013 (e.g. supplementary capital limited to the institution’s core capital; and term debt capital limited to 50% core capital) will not be eligible for the gradual phasing-out treatment (i.e. any such excess amount should be excluded from the calculation of the base amount). Nevertheless, such instruments will be allowed to be fully recognized (i.e. without limitation) on and after 1 January 2013 if they meet all the qualifying criteria specified in
Schedule 4B for inclusion in Additional Tier 1 capital or Schedule 4C for inclusion in
Tier 2 capital of the BCR, as the case may be, and with the approval of the HKMA.
3. Where an instrument’s recognition in capital is subject to amortization on or before 1
January 2013, only the amortized amount recognized in capital on 1 January 2013 should be taken into account in the amount fixed for transitioning rather than the full nominal amount. The instrument will continue to amortize on a straight-line basis at a rate of 20% per annum during the transition period, while the aggregate cap will be reduced at a rate of 10% per year.
4. Share premium may be included in the base provided that it relates to an instrument that
is eligible to be included in the base for the transitional arrangements.
5. Non-qualifying instruments that are denominated in a foreign currency should be
included in the base using their value in the reporting currency of the institution as at January 1, 2013. The base will be fixed in the reporting currency of the institution throughout the transition period. During the transition period, instruments denominated in a foreign currency should be valued as they are reported on the balance sheet of the institution at the relevant reporting date (adjusting for any amortization in the case of Tier 2 instruments).
6. Where an instrument is fully derecognized on 1 January 2013 or otherwise ineligible for
these transitioning arrangements, the instrument must not be included in the base fixed on 1 January 2013.

Non-complying capital instruments eligible for phase-out treatment
7. The following rules will be applied to determine the extent to which non-complying
capital instruments (issued by AI directly or through a subsidiary) are eligible for the phase-out treatment - (a) Capital instruments issued prior to 12 September 2010 that previously qualified as regulatory capital but do not meet the Basel III qualifying criteria for regulatory capital (on a forward looking basis) will be considered non-complying capital instruments and subject to phase-out as described in this Annex.

8 Where an instrument is derecognized at 1 January 2013, it will not be eligible for grandfathering and does not count towards the base fixed on 1 January 2013.

MA(BS)3(II) Annex/P.13 (06/2019)
(b) Capital instruments issued before 1 January 1 2013 that meet the Basel III qualifying criteria for regulatory capital, except that they do not meet the “non￾viability requirements” 9 , will be considered non-complying capital instruments and subject to the phase-out described in this Annex. (c) Capital instruments issued between 12 September 2010 and 1 January 2013 that do not meet one or more of the Basel III qualifying criteria for inclusion in regulatory capital (other than the non-viability requirements) will be excluded from regulatory capital as of 1 January 2013 (i.e. they will not be subject to the phase-out described in this Annex). (d) Capital instruments issued after 1 January 2013 must meet all of the Basel III criteria for regulatory capital (including the non-viability requirements) to qualify as regulatory capital. Instruments that do not meet all of these requirements will be excluded from regulatory capital for the purpose of determination of capital base.
8. Instruments with an incentive to redeem will be treated as follows:
Characteristics of capital instruments Phase-out Derecognize Recognize

1. Call and step-up
   date prior to 1
   January 2013, is not called and meets the new criteria √
2. Call and step-up
   date on or after 1
   January 2013, is not called and meets new criteria √ Starting 1 January 2013 until effective maturity date √ From effective maturity date onwards
3. Call and step-up
   date between 12
   September 2010 and 1 January 2013, is not called and does not meet new criteria √ On 1 January 2013

9
Minimum requirements to ensure loss absorbency at the point of non-viability, Annex 1 of BCBS Press Release Basel Committee issues final elements of the reforms to raise the quality of regulatory capital, 13 January 2011.

MA(BS)3(II) Annex/P.14 (06/2019)
Characteristics of capital instruments Phase-out Derecognize Recognize
4. Call and step-up
date on or after 1
January 2013, is not called and does not meet new criteria √ Starting 1 January 2013 until effective maturity date √ On effective maturity date
5. Call and step-up
date on or prior to
12 September 2010, was not called and does not meet new criteria √ Starting 1 January 2013 (a) For an instrument that has a call and a step-up (or other incentive to redeem) prior to 1 January 2013, if the instrument is not called at its effective maturity date10 and on a forward-looking basis (i.e. from the effective maturity date) will meet the new criteria for inclusion in Additional Tier 1 capital or Tier 2 capital, it will continue to be recognized in that tier of capital. (b) For an instrument that has a call and a step-up (or other incentive to redeem) on or after 1 January 2013, if the instrument is not called and its effective maturity date and on a forward looking basis will meet the new criteria for inclusion in Additional Tier 1 capital or Tier 2 capital, it will continue to be recognized in that tier of capital. Prior to the effective maturity date, the instrument will be considered an “instrument that no longer qualifies as AT1 or Tier 2” and will therefore be phased out from 1 January 2013. (c) For an instrument that has a call and a step-up (or other incentive to redeem) between 12 September 2010 and 1 January 2013, if the instrument is not called at its effective maturity date and on a forward-looking basis (i.e. from the effective maturity date) will not meet the new criteria for inclusion in Additional Tier 1 capital or Tier 2 capital, it will be fully derecognized in that tier of capital from 1 January 2013. (d) For an instrument that has a call and a step-up (or other incentive to redeem) on or after 1 January 2013, if the instrument is not called at its effective maturity date and on a forward-looking basis (i.e. from the effective maturity date) will not meet the new criteria for inclusion in Additional Tier 1 capital or Tier 2 capital, it will be fully derecognized in that tier of capital from the effective maturity date. Prior to the effective maturity date, the instrument will be considered an “instrument that no longer qualifies as AT1 or Tier 2” and will therefore be phased out from 1 January 2013.

10
Effective maturity date refers to the incentive to redeem date. Instruments without an incentive to redeem would not have an effective maturity date other than their scheduled maturity (if any).

MA(BS)3(II) Annex/P.15 (06/2019)
(e) For an instrument that has a call and a step-up (or other incentive to redeem) on or prior to 12 September 2010, if the instrument was not called at its effective maturity date and on a forward-looking basis (i.e. from the effective maturity date) does not meet the new criteria for inclusion in Additional Tier 1 capital or Tier 2 capital, it will be considered an “instrument that no longer qualifies as AT1 or Tier 2” and will therefore be phased out from 1 January 2013.

MA(BS)3(II) Annex/P.16 (06/2019)
Annex II-F
Illustrative example –
Recognition of non-qualifying capital instruments during the transitional period Subject to Schedule 4H of the BCR, the extant capital instruments of an authorized institution that were included in the institution’s capital base immediately before 1 January 2013 but do not meet all the qualifying criteria set out in Schedule 4B and 4C of the BCR, as the case may be, must be phased out during the 10-year period. Assume Bank A has three outstanding non-qualifying Tier 2 debt instruments as at 1 January 2013 which are eligible for phase-out:
(a) 10-year Term Debt: Notional amount of $1,000 to be matured on 1 January 2019; (b) 10-year Term Debt: Notional amount of $500 with a call option on 1 January 2015 (assume that it will be derecognized after 1 January 2015) (c) Perpetual Debt: Notional amount of $500 Based on the above information, the amount of non-qualifying capital instruments that may be recognized in Tier 2 capital of Bank A from 1 January 2013 to 31 December 2022 has been worked out in the following table. Authorized institutions are suggested to follow the below 4 steps in deriving the eligible amount that can be included as part of its capital base each year during the phase-out period. Step 1: Consider the maturity profile of each non-compliant instrument, including the 5-year amortization Step 2: Calculate the total amount of all non-compliant capital instruments [A] Step 3: Calculate the capped amount (subject to 10% phase-out) by fixing the base on 1 January 2013 [B] Step 4: The lower of either [A] or [B] is the amount that could be recognized as Tier 2 capital [Min (A,B)]

MA(BS)3(II) Annex/P.17 (06/2019)
Reporting
Date
Step 1 Step 2 Step 3 Step 4
Debt (a) Debt (b) Debt (c)
Total amount of all non-compliant capital instruments [A] Cap amount at each year# [B] Amount that may be recognized in Tier 2 capital [Min (A,B)] 1/1/2013 $1,000 $500 $500 $2,000 $1,800 $1,800 1/1/2014 $1,000 $500 $500 $2,000 $1,600 $1,600 1/1/2015 $800* $0 $500 $1,300 $1,400 $1,300 1/1/2016 $600 $0 $500 $1,100 $1,200 $1,100 1/1/2017 $400 $0 $500 $900 $1,000 $900 1/1/2018 $200 $0 $500 $700 $800 $700 1/1/2019 $0 $0 $500 $500 $600 $500 1/1/2020 $0 $0 $500 $500 $400 $400 1/1/2021 $0 $0 $500 $500 $200 $200 1/1/2022 $0 $0 $500 $500 $0 $0 Note:

• Debt (a) starts in 2015 the 20% straight line amortization in the remaining 5 year before maturity.

The extant Tier 2 capital instruments subject to phase-out as at 1.1.2013 are $2,000. Therefore, this cap amount will be reduced by 10

percentage points in each subsequent year.