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    SARB Directive Addresses Issuance of Certain AT1 Capital Instruments

    March 12, 2021

    SARB published the Directive D2/2021 that explains the stance of the Prudential Authority on the South African banks efforts to seek to include a contingent payment provision in the terms and conditions of their additional tier 1, or AT1, capital instruments. The Prudential Authority is not opposed to banks including the contingent "must-pay" clause in the terms and conditions of both local and foreign currency denominated additional tier 1 instruments. However, banks that elect to utilize the contingent "must-pay" clause as part of the additional tier 1 instruments’ terms and conditions must note that the Prudential Authority will not approve the issuance of additional tier 1 instruments, unless it is also stated in the terms of the instrument that, in the event that the point of non-viability is triggered by the Prudent Authority, such a decision would not constitute a capital disqualification event.

    The Directive states that inclusion of the contingent "must-pay" clause shall neither amend nor revise the current terms and conditions of additional tier 1 instruments, in line with the terms of regulation 38(11)(b) of the Regulations or the guidance provided in Guidance Note 6 of 2017, as they relate to additional tier 1 capital. Therefore, the rights of the holders of the additional tier 1 instruments and the powers of the Prudential Authority, should a capital disqualification event occur and the contingent "must-pay" clause is invoked as a result of the occurrence of a capital disqualification event, shall be fully disclosed within the contractual pricing supplement or prospectus of the instrument. The issuance of all additional tier 1 instruments is subject to the prior written approval of the Prudential Authority, as per the terms of regulation 38(11)(b)(ii) of the Regulations. The Directive also sets out the requirements to be met for when the Authority will consider an application for approval for the issuance of additional tier 1 instruments. 

    • Coupons that are payable under the contingent "must-pay" clause must only be the coupons accruing after the instrument has been disqualified from regulatory capital in its entirety.
    • Coupon payment obligation becomes mandatory on each interest payment date once the instrument has been derecognized in full from qualifying capital.
    • Total value of additional tier 1 instruments with a contingent "must-pay" clause shall be limited to 25% of the qualifying tier 1 capital and reserve funds; this limit would be assessed and enforced at the time of each application in terms of section 79 of the Banks Act, Act No 94 of 1990.


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    Keywords: Middle East and Africa, Banking, Regulatory Capital, Prudential Authority, Must-Pay Clause, Additional Tier 1 Capital, Basel, SARB

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