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Consultation paper on Proposed changes to the AML Rules


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Consultation paper on umbrella sandbox

INTRODUCTION

1. Astana International Financial Centre (AIFC) has issued this Consultation Paper to seek suggestions from the market on the proposed approach on regulation of Umbrella Sandbox regulatory regime.

2. The proposals in this Consultation Paper will be of interest to current and potential AIFC participants who are interested in exercising business activities in or from the AIFC.

3. All comments should be in writing and sent to the address or email specified below.

4. If sending your comments by email, please use “Consultation Paper AFSA–CE–2021–0001” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments.

5. The AFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

6. The deadline for providing comments on the proposals is 26 February 2020.

7. Once we receive your comments, we shall consider if any refinements are required to this proposal.

8. Comments to be addressed by

Consultation Paper No. AFSA–CE–2021–0001

AIFC FinTech Hub

55/18, Mangylyk El avenue, block C-3.3, Astana, Kazakhstan

or emailed to: r.abdirassilov@aifc.kz

BACKGROUND

1. AFSA is proposing the introduction of new FinTech Lab regulatory regime “Umbrella Sandbox”, which shall complement existing FinTech Lab regulatory regimes of Testing and Developing FinTech Lab Activities.

2. The concept of the Umbrella Sandbox regime envisages authorisation of a Principal (e.g. university, research organisation, venture capital fund or other financial institution) that would further allow PRep (e.g. university students, professors, investee or start-ups firms) to offer FinTech services under the Licence of Principal.

3. Umbrella sandbox is for small-scale testings of feasibility of early-stage business models and ideas to verify that some FinTech product/service has practical potential. Given that Umbrella sandbox regulatory regimes primarily is designed for small group of innovators with minimum viable products, compared to the existing FinTech Lab regime, Umbrella sandbox regime aims to attract different market of innovators, which are at their early stage of development of their FinTech products/services.

4. The analogous practice of Umbrella Sandbox has been also implemented in other leading jurisdictions such as United Kingdom and Singapore, whereby a firm or person may run regulated financial activities and act as an agent for a financial firm directly authorised by the UK Financial Conduct Authority .

5. Implementation of Umbrella sandbox regime jointly with another AFSA initiatives such as development of Intellectual Property regime, digital (mobile) banking, payments and e-money, venture capital frameworks is another step towards the development and enhancement of comprehensive AIFC FinTech ecosystem.

PROPOSAL

6. Conceptually the Umbrella Sandbox is a regulatory lab designed for universities, venture capital funds, financial institutions and research organisations (“Principals”) to allow its students, professors, researchers and start-ups (“Principal Representatives”) to experiment and test FinTech products/services under the licence of its Principal, whereby the authorisation and supervision will be performed by the Principal who is in turn authorised and supervised by the AFSA.

7. The Principal, “incubator”, allows its regulatory permissions to be used by the Principal Representative (hereinafter – PRep), so that the PRep can perform financial services under those regulatory permissions of the Principal whilst retaining its own identity, ownership and control. In other words, the compliance function of the PRep is outsourced to the Principal with appropriate compliance knowledge, financial and human resources, systems and controls.

8. The deployment of Umbrella Sandbox would allow:

a) Innovators or PRep: to grow and focus primarily on the testing and development of financial services under the regulatory wing of its Principal, establish close collaboration with universities, financial institutions and venture capital funds to get access to talents, capital, compliance systems and controls, knowledge and expertise of a Principal;

b) Principals: gain first-hand insights from innovators and establish collaboration with financial innovative businesses.

c) Consumers: reduce risk of consumer exposure to harm due to the outsourcing of compliance function to the Principal with appropriate financial, human and compliance resources, enable more innovative products to reach the market that may otherwise never have been tested; and

d) AFSA and AIFC: clearly signal to the market that innovation is firmly on the regulatory agenda that would help to further promote the development of FinTech within the vibrant and innovation prone AIFC FinTech ecosystem.

REGULATORY APPROACH

1.AFSA seeks to establish sound and flexible AIFC regulatory regimes of a high standard that promotes sustainable and safe environment and help firms to innovate. However, new entrants with untested business models expose consumers to new risk exposures. Therefore, AFSA sees that promotion of collaboration and outsourcing of compliance function of start-ups (PRep) to established institutions (Principals) would reduce the regulatory risks for consumers.

2.The regulatory approach in designing the proposed Umbrella Sandbox regime is primarily based on the UK legislation and current FinTech Lab practices.

Responsibility of Principal

3.The Principal must apply to FinTech Lab to obtain a Licence to offer regulated activities under the existing FinTech Lab licensing process.

4.Before a Principal appoints a Person as a PRep, the Principal must seek an approval from the AFSA on appointment of a PRep and must have:

a)appropriate FinTech Lab Licence for the regulated financial activity that the PRep is willing to conduct under the Principal’s FinTech Lab Licence; and

b)adequate controls over the PRep regulated activities for which the firm has responsibility;

c)appropriate resources to monitor and enforce compliance of the PRep with the relevant regulatory requirements;

d)complaints handling procedures, including provision of contact details of PRep, Principal and AFSA to Clients; 

e)appropriate systems and controls to enable the PRep to comply properly with any limitations or requirements of its own permission; and

f)no close links with PRep and its employees which would be likely to prevent the effective supervision of the PRep by the Principal.

The eligibility criteria to become a PRep

5.A Person to become a PRep must:

a)be fit and proper;

b)be solvent;

c)be capable of being effectively supervised by Principal and AFSA; and

d)enter into contract agreement with Principal which permits the PRep to carry on financial services under the FinTech Lab Licence of Principal.

6.The proposed FinTech Lab Activities of PRep must:

a) fall within the scope of the permission under the Principal’s Licence;

b)be in a sufficiently advanced stage of development to mount a live test with real customers; and

c)promote innovation.

7.A Principal must ensure that the PRep satisfies eligibility criteria on becoming PRep. The result of such assessment shall be presented to the AFSA. After the AFSA has been convinced that the requirements are sufficiently met, AFSA may permit a person to offer FinTech Lab Activities under the Licence of Principal in the capacity of PRep, impose additional and/or adjust/modify the individual limitations and conditions applicable to Principal and/or its PReps.

8.In reviewing the eligibility of the PRep, the AFSA, among others, shall consider the nature (including the scale and complexity) of the regulated activities of the Principal and its PReps and any associated risks that those activities pose to the AFSA’s Regulatory Objectives.

Continuing obligations of Principals with PReps

9.Principal must monitor and check the activities of its PRep on a regular basis to ensure the PRep complies with obligations imposed by AIFC or AFSA regulatory requirements. Normally the Principal is expected to submit monthly reports to AFSA on the results of such checks. 

10.The PRep may offer permitted activities under the Principal’s Licence for a period of up to two years, but which should not exceed the validity of the Principal’s Licence. Subject to AFSA approval this period may be extended or shortened, subject to extension or shortening of validity of the Principal’s Licence.

11.A Principal must not permit a PRep to hold client money unless otherwise permitted by AFSA.

Final provisions

12.To ensure greater level of responsibility of Principal for compliance of PReps, anything that a PRep has done or omitted to be done as respects the business for which the Principal has accepted responsibility will be treated as having been done or omitted to be done by the Principal.

13.The senior management of a Principal should be aware that the activities of PReps are an integral part of the business that they manage. The responsibility for the control and monitoring of the activities of PReps rests with the senior management of the Principal.

14.Principals with sufficient resources that can ensure regulatory compliance of its PReps with AIFC/AFSA requirements may appoint several PReps so that PReps could offer several types of regulated services in the AIFC under the Principal’s FinTech Lab Licence/-s.  

15.Principals should be aware that, under the existing AFSA regulatory regime, the Principal is responsible for submitting applications to the AFSA for the approval of a person who performs controlled functions of the Principal and/or PRep. 

16.If a contract with a PRep is terminated or substantially amended, a Principal must take all reasonable steps to ensure that:

a)if the contract between the PRep and Principal is terminated, contract parties and AFSA shall be notified immediately that the contract is terminated, and PRep is no longer permitted to offer regulated activities;

b)outstanding regulated activities and obligations to Clients are properly completed and fulfilled either by Principal and/or PRep;

c)where appropriate, Clients are informed of any relevant changes;

17.The implementation of Umbrella Sandbox regime implies potential amendments to AIFC General Rules and mostly would entail amendments to the AIFC Financial Technology Rules.

Consultation paper on Regulation of payment services and electronic money in the AIFC

1 Introduction and scope of policy paper

1.1 The Astana Financial Services Authority (the AFSA), as the independent regulator of the Astana International Financial Centre (AIFC) is seeking to develop a regulatory framework for payment services and electronic money in the AIFC (the Framework or the PSEM Framework).


1.2 This policy paper outlines our proposal for the Framework, including its aims, operation, and interaction with the current regulatory environment in the AIFC. The AFSA has made key policy decisions following its consideration of the preliminary proposals contained in this policy paper, and these decisions are outlined in the summary of policy issues provided by the AFSA on 30 October 2020 contained in Schedule 1 and Schedule 2.


1.3 At a high level, the AFSA has specified that the Framework should be developed with the aims of:

  1. (a)establishing an integrated and efficient payments market within the AIFC;
  2. (b)facilitating the development and emergence of new, innovative, and secure e-money and payment services;
  3. (c)providing companies and individuals with access to the e-money and payment services market, whilst also ensuring customers' protection; and
  4. (d)encouraging effective competition within the market of the AIFC.[1]

1.4 Our proposal for the Framework has been developed in accordance with the governing law of the AIFC, and is based on English law. We have also considered international best practice in regulating payment services and e-money, including the approaches taken in Singapore and Australia.


1.5 Our proposal for the Framework is also compatible with the AFSA's regulatory objectives, as set out in section 7 of the AIFC Financial Services Framework Regulations (FSFR).


1.6 In summary, we propose to introduce the provision of payment services and the issuance of e-money as new Regulated Activities (which will be set out in Schedule 1 of the AIFC General Rules (GEN)). The Framework will be implemented through new AIFC Rules known as the "Payment Services and Electronic Money Rules" or "PSEM".


1.7 The Framework will:

  1. (a)complement Chapter 1 of Part 3 of the FSFR (Licensing of Authorised Firms) to provide for the licensing and registration of institutions who wish to carry on the new Regulated Activities;
  2. (b)provide for specific conduct of business rules that will apply to those institutions, regulating the rights and obligations of all parties involved in the relevant market; and
  3. (c)complement the provisions in Part 8 of the FSFR (Supervision of Authorised Persons) and Chapter 6 of GEN (Supervision), to outline rules in relation to the supervision of both Relevant Authorised Firms and certain other specified entities providing payment services or issuing e-money.


1.8 It follows that the AFSA will be responsible for the regulation of institutions providing payment services or issuing e-money that are licensed under FSFR and GEN or registered under the Framework, and enforcement of the conduct of business rules.


1.9 We propose that the Framework sets out any specific conditions for licensing or registration, as well as the rights and obligations of parties to which the Framework applies. It will not seek to prescribe the specific approach that the AFSA will take in relation to supervision and enforcement under the Framework.


[1] Page 4, AFSA, Terms of Reference for Development of E-Money and Payment Services Framework in the Astana International Financial Centre

2 Financial regulation in the AIFC

2.1 The current regulation of financial services in the AIFC is provided for in a number of regulations and rules. The General Rules (GEN) and the FSFR are the most relevant to the Framework, however the Conduct of Business Rules (COB), Authorised Market Institution Rules, the Banking Prudential Guideline, the Banking Business Rules, the Anti-Money Laundering (AML) and Counter-terrorist financing (CTF) Rules, the Law of the Republic of Kazakhstan “On Counteracting Legalisation (Laundering) of Illegally Gained Income and Financing of Terrorism” No. 191-IV dated 28 August 2009, and the Constitutional Law of the Republic of Kazakhstan “On the Astana International Financial Centre” No. 438-V dated 7 December 2015 (the Constitutional Statute) are also relevant. We anticipate that a number of amendments will be required to the existing AIFC regulations and rules as a consequence of adopting the Framework (see section 5.1)


2.2 The existing financial services regulatory framework in the AIFC is similar to the UK's. Both jurisdictions share the legal concept of regulated activities, and a general prohibition on carrying out regulated activities without authorisation (in the UK) or a licence (in AIFC). However, we note the AIFC's concept of Market Activities[1] as distinct from the UK regulatory regime.


2.3 The AFSA regulates financial and non-financial services activities, and is the AIFC equivalent of a National Competent Authority for the purposes of EU law, as the Financial Conduct Authority is in the UK (FCA). The AFSA issues licences for AIFC Participants (Participants)[2] wishing to carry on Regulated Activities[3], Market Activities, or Ancillary Services[4], and is responsible for enforcing the AIFC rules and regulations.


2.4 However, the AIFC does not currently have a regulatory framework for payment services or e-money. Both of these are important in creating and supporting a transparent, fair, and modern digital ecosystem in the financial services industry.


2.5 The proposals in this policy paper are intended to be incorporated into the AIFC's existing financial services regulatory framework, and are consistent with the key concepts of having regulated activities, conduct of business rules, and licensing or registration by a supervisory body.


2.6 Regulation of Islamic Finance in the AIFC is provided for primarily in the Islamic Finance Rules and the Islamic Banking Business Prudential Rules. The AIFC provides a framework for Islamic Banking Businesses and specifies Regulated Activities relating to Islamic Finance. The proposals in this policy paper do not reference Islamic Finance directly, mirroring the UK's generally "religion-neutral" regulatory approach. At a high level, we do not consider that the proposals in this policy paper conflict with the general principles of Islamic Law.


[1] As defined in Section 18, FSFR

[2] As defined in Article 1(5) of the Constitutional Statute

[3] As defined in Section 17, FSFR

[4] As defined in Section 19, FSFR

3 Payment services

3.1 Scope and key concepts


3.1.1 Broadly speaking, there are two types of payment schemes: those made through four party schemes, and those made through three party schemes.

(a)Four party schemes involve two parties providing payment services. For example, one bank providing services to a payer, with another bank providing services to the payee. These banks may be linked by a payment scheme or a specific relationship.

(b)Three party schemes (or closed schemes) involve one party providing payment services to both the payer and the payee. The transaction travels across the books of this one provider, such as is the case for PayPal or AmEx.


3.1.2 At a high level, these are the processes that will be regulated under the Framework (although the distinction between three and four party schemes will not directly affect parties' obligations under the Framework).


3.1.3 Payment systems enable the transfer of funds, as set out at 3.1.1. We propose to regulate payment services, meaning the services offered to individuals, businesses, and other organisations. This reflects the technology neutral approach to regulation set out at Error! Reference source not found., and allows payment systems to evolve without needing to amend the regulatory framework.


3.1.4 We propose that payment services be separately regulated to Market Activities and instead included as a new Regulated Activity. This is slightly different to the UK's regulatory approach, which provides a separate regime for the regulation of payment services. Certain Authorised Persons[1] will also be permitted to provide payment services under the Framework without holding a specific payment services licence or registration. This reflects the fact that certain Authorised Persons are already supervised by the AFSA to a sufficiently high standard to allow them to participate in the payment services market.


3.1.5 The Framework will regulate Participants (being legal entities registered under the Acting Law of the AIFC and recognised by the AIFC) that provide payment services and will designate which Participants are permitted to provide payment services. Participants providing payment services as a regular occupation or business activity in the AIFC[2] will be regulated as "payment service providers" in the Framework.


3.1.6 Authorised Market Institutions[3] and Participants who hold a licence to carry out the regulated activities of Islamic Banking Business, Accepting Deposits, Providing Credit, and Providing Money Services (Relevant Authorised Firms) will be permitted to carry on payment services under the Framework. Many of these Participants will already provide payment services to some degree. It should be noted that the AIFC Framework for Mobile and Digital Banking Services (MDB Framework) policy paper[4] proposes to develop a standalone regulatory framework for digital-only banks and a phased approach to full authorisation for these banks (including a limited licence where a digital bank only provides limited Regulated Activities). Assuming the MDB Framework policy paper will be finalised before the Framework is finalised, it must be ensured that the Framework's provisions as to Relevant Authorised Firms (which could include digital-only banks) are consistent with the MDB Framework.


3.1.7 In addition, the Framework will introduce the categories of licensed Payment Institutions (PIs), registered small Payment Institutions (SPIs), licensed Electronic Money Institutions (EMIs), and registered small Electronic Money Institutions (SEMIs), (EMIs and SEMIs are discussed in full at 4) who will also be permitted to provide payment services.


3.1.8 We propose that PIs fall within the existing licensing regime under GEN, but that the Framework include a new registration regime for SPIs to ensure that they are regulated. This allows non-bank Participants to participate in the payments market, but with less onerous obligations than would be imposed on a Participant who wished to accept deposits, for example. This reflects the principle set out at Error! Reference source not found., and has the dual function of opening up the payments market to new entrants, whilst also ensuring the integrity of existing Participants. This proposed regime is set out in full at 3.2.


3.1.9 As a result, entities providing payment services must only do so in accordance with the general prohibition in the FSFR (the General Prohibition). The Framework will introduce an exemption to the General Prohibition for certain Participants providing payment services such as Relevant Authorised Firms and registered payment service providers.


3.1.10 This regime is supplemented by conduct of business rules, which are set out in full at 3.4, and which regulate:

(a)the information to be provided to payment service users before and after executing a payment transaction; and

(b)the rights and obligations of both payment service providers and payment service users in respect of a payment transaction.


3.1.11 Payment services under the Framework will encompass activities such as:

  1. (a)services which enable money to be paid into and out of bank accounts;
  2. (b)execution of transactions, such as payments made via payment instruments or devices, direct debits, credit transfers, and debit payments;
  3. (c)execution of transactions as above, but where funds are covered by a line of credit, such as an overdraft facility;
  4. (d)issuing of payment instruments and/or acquiring of payment transactions;
  5. (e)money remittance;
  6. (f)account information services (AIS); and
  7. (g)payment initiation services (PIS).

3.1.12 A light touch registration regime will apply to payment service providers which solely provide the payment service of AIS, and these entities will be known as registered AIS providers (RAISPs). This mirrors the UK approach, which allows for entities to solely provide AIS without having to go through the onerous full licensing process that forms part of the Regulated Activity regime. Any payment service providers seeking to provide only PIS, or AIS in addition to other payment services, would still need to become fully licensed within the existing AIFC Regulated Activity regime unless they meet the requirements to register as an SPI or SEMI.


3.1.13 Transactions which are executed wholly in cash (this does not include ATMs) or based on paper documents such as cheques will not be within the scope of the Framework, and nor will transactions relating to securities settlement systems, clearing houses, etc., or transactions relating to securities asset servicing, such as dividends, share sales, unit redemptions, etc.


3.1.14 The Framework will also introduce the concepts of, and provide for:

  1. (a)payment accounts, meaning accounts held in payment service users' names used for executing payment transactions;
  2. (b)payment orders, meaning instructions by a payer or payee to its payment service provider requesting the execution of a payment transaction;
  3. (c)payment instruments, meaning personalised devices or sets of procedures (or both), agreed between the payment service user and payment service provider, and used to initiate payment orders (such as debit cards, credit cards, credit transfers and direct debits); and
  4. (d)payment service users, meaning persons making use of a payment service as a payer, payee, or both.


3.1.15 We acknowledge the potential overlap between the above concepts and the existing definitions set out in GEN and the AIFC Glossary (GLO), and confirm that this overlap will be addressed in the drafting of the Framework.


3.1.16 There are certain requirements in the payment services aspects of the Framework that will apply to Participants that are not payment service providers, specifically:

  1. (a)Participants that rely on exclusions relating to limited networks, electronic communications, or ATM operations must notify the AFSA that they are doing so;
  2. (b)Participants providing currency conversion services will need to provide certain information to the AFSA; and
  3. (c)Participants that impose charges or reductions when using a given payment instrument will need to provide certain information to the AFSA. 


3.2 Licensing and registration regime


3.2.1 The Framework will require Participants that provide payment services to be one of the following:

  1. (a)a Relevant Authorised Firm (see 3.1.6);
  2. (b)a PI[5];
  3. (c)an SPI;[6]
  4. (d)a RAISP;
  5. (e)an EMI; or
  6. (f)a SEMI.


3.2.2 The SPI categorisation assists smaller Participants, who have an actual or projected average turnover in payment transactions below a prescribed threshold, to enter the payments market. In the UK, the average of the preceding 12 months' total amount of payment transactions executed by the Participant must not exceed €3 million (or an equivalent amount) per month. The AFSA has confirmed that the equivalent threshold in the AIFC will be $3,500,000 USD.


3.2.3 To apply to become a PI or an SPI, a Participant will be required to submit an application to the AFSA and pay a fee. In the UK, these fees range from £250 for re-registration, to £5,000 for a new licence as a PI. The AFSA has confirmed that the equivalent fees in the AIFC will be $1,000 USD for SPIs and $3,500 USD for PIs. The information that must be provided by an applicant Participant will vary depending on the type of registration / licence sought, but may include:

  1. (a)a description of its business or business plan and of its product/s;
  2. (b)policies and procedures in relation to internal governance arrangements, security, safeguarding, business continuity, customer on-boarding, anti-money laundering, incident reporting, customer grievance redressal measures, managing sensitive payment data and audit; and
  3. (c)details of the organisational structure, senior managers and responsible persons and persons that control the Participant.


3.2.4 As discussed at 1.9, the Framework will not prescribe the AFSA's approach to assessing and determining these applications. In the interests of assisting Participants to seek licensing / registration, the AFSA may choose to publish guidance or information on its decision-making process and timing in a similar manner to its existing "Guidebook on Authorisation of AIFC Participants and Recognition of Non-AIFC Members".


3.3 Ongoing requirements


3.3.1 As well as requiring market participants providing payment services to be licensed or registered, the Framework will impose ongoing requirements on payment service providers, relating to:

  1. (a)capital requirements, including:
  2. (i)initial capital, meaning payment service providers must hold a prescribed amount at the stage of applying for licensing or registration, which can be made up of capital instruments, share premium accounts, retained earnings, or other comprehensive income or reserves; and
  3. (ii)ongoing capital, meaning payment service providers must carry at all times an amount that is the greater of their initial capital or their own funds amount, (which is calculated based on a firm's fixed overheads, average monthly payment volume, or previous year's income);
  4. (b)safeguarding requirements, where PIs and SPIs must safeguard sums received from a payment service user for executing transactions or received from another payment service provider for executing their payer's transaction. Safeguarding can take the form of segregating funds or insurance / comparable guarantee. One way to comply with the segregation of funds method is to invest in liquid, low-risk assets approved by the appropriate regulator. The payment service provider can also choose to deposit the relevant funds in a separate account held with a licensed bank;
  5. (c)reporting and notification requirements, which will apply to payment service providers on an ongoing basis (such as annual financial returns), as well as event-driven notifications (such reporting major security incidents);
  6. (d)outsourcing and use of agents requirements, where PIs, SPIs and other payment service providers must comply with obligations relating to registration, liability, and governance; and
  7. (e)accounting and statutory audit obligations to the AFSA. These obligations will not apply to all payment service providers. Only PIs that carry out activities other than the provision of payment services must comply with these accounting and statutory audit obligations, reflecting the UK's regulatory approach. Under the UK framework, these obligations would not, for example, apply to SPIs, or to payment service providers that do not carry out activities other than the provision of payment services.


3.3.2 The reason for the Framework containing the ongoing requirements (rather than by amendment to GEN) is because they will apply to certain non-licensed entities such as SPIs and RAISPs.


3.3.3 These ongoing requirements are in addition to the requirements on Authorised firms in GEN which will apply to PIs. It will be necessary to consider which (if any) of the rules in GEN ought not to apply to PIs. Where the AFSA wishes for some of requirements in GEN to apply to registered payment service providers (such as SPIs and RAISPs), it will need to make specific provision for this in the Framework or GEN.


3.3.4 We note that the MDB Framework policy paper proposes a standalone set of rules applying to digital-only banks – the AIFC Digital Bank Rules (DBR). The MDB Framework policy paper also provides that Authorised Digital Banks would be limited to providing some or all of the Regulated Activities in Schedule 1 (Regulated Activities) of GEN, including Providing Money Services. It will be important to ensure that the DBR do not include provisions that conflict with the Framework. Presumably, a digital-only bank that provides payment services would be subject to the DBR, but they would also be subject to the ongoing requirements and conduct of business obligations of the Framework (summarised in this section 3.3 and the following section 3.4). It will also be necessary to ensure that the payment services activities listed in the definition of Providing Money Services either do not overlap or are consistent with those we propose to include in the Framework (including those set out in section 3.1.11).


3.3.5 The MDB Framework policy paper also sets out suggestions concerning security standards (e.g. strong customer authentication), client on-boarding, cybersecurity, business recovery, outsourcing, client terms, authorised status and consumer protection. However, the MDB Framework policy paper leaves it to the AFSA to consider whether to take a prescriptive approach in such areas, or to merely set out certain areas where Relevant Authorised Firms need to provide policies and procedures to address these to the satisfaction of the AFSA. If the MDB Framework were to contain prescriptive measures concerning these areas, it would be necessary to ensure that they do not conflict with any of the ongoing requirements and conduct of business obligations in the Framework, which would be imposed on firms carrying out payment services.


3.4 Conduct of business rules


3.4.1 The conduct of business rules set out in the Framework will apply to payment services where they are provided from an establishment maintained by a payment service provider (or its agent) in the AIFC, and to transactions where one of the parties' payment service provider is in the AIFC. In certain instances, the rules will apply to a lesser extent. A "corporate opt-out" will also be available, to allow payment service providers to agree with non-retail customers to derogate from certain conduct of business rules.[7] The reason for the Framework containing the conduct of business rules (rather than by amendment to COB) is because they will apply to certain non-licensed entities such as SPIs, SEMIs and RAISPs.


3.4.2 The conduct of business rules under the Framework will be in addition to the rules in COB which will apply to PIs and EMIs. It will be necessary to consider which (if any) of the rules in COB ought not to apply to PIs and EMIs. Where the AFSA wishes for some of the rules in COB to apply to registered payment service providers (such as SPIs, RAISPs and SEMIs), it will need to make specific provision for this in the Framework or COB.


3.4.3 In relation to information requirements, the Framework will distinguish between, and apply different rules to:

  1. (a)an ongoing payment agreement, meaning a contract governing the future execution of individual and successive payment transactions, such as parts of a bank's current account terms and conditions; and
  2. (b)a one-off payment service, meaning a contract governing a single payment transaction not covered by an ongoing payment agreement.


3.4.4 The conduct of business rules will apply high level requirements to both forms of contract, with more granular requirements relating to each. For ongoing payment agreements, information requirements are generally engaged in relation to the formation of the contract, whilst for one-off payment services, the requirements apply to the transaction itself. The information requirements are qualitative (e.g. information to be provided in an easily accessible manner) and quantitative (e.g. details of charges, interest, and exchange rates).


3.4.5 In relation to parties' rights and obligations:

  1. (a)on executing payment transactions:
  2. (i)timeframes should be set out for execution, value dating, crediting funds, and displaying these as available to the payee;
  3. (ii)payment service providers should distinguish between authorised and unauthorised transactions, with mechanisms for customers to give consent to execute payment transactions;
  4. (iii)payment service providers should only debit payments upon receipt of a valid payment order; and
  5. (iv)payers should not be able to revoke a payment order after it has been received by their payment service provider, with limited exceptions (for example, relating to direct debits and future-dated payments);
  6. (b)on liability:
  7. (i)this is generally apportioned on the basis of who initiated the payment transaction (such as where the payer initiates a transaction, their payment service provider is liable to them for correct execution);
  8. (ii)for unauthorised payment transactions, the customer must notify its payment service provider of any unauthorised transactions, whilst the payment service provider bears the burden of proof for demonstrating that transactions are properly executed; and
  9. (iii)customers' liability is capped for losses in connection with loss, theft, etc., but not fraud or breach of their obligations, and customers are liable for providing incorrect information leading to loss (such as providing an incorrect unique identifier);
  10. (c)on payment instruments, these should not be misused by customers, whilst payment service providers must ensure their security; and
  11. (d)on charging, payment service providers should generally not be able to charge customers, and any charges must be agreed between the parties.


3.4.6 However, regulatory frameworks do not exist in a vacuum. For example, payment service providers in the UK must comply with various pieces of legislation. In addition to the key statutes relating to payment services and e-money, provisions of other laws impose obligations relating to:

  1. (a)general standards and principles of governance imposed by regulators;[8]
  2. (b)accountability of senior staff;[9]
  3. (c)consumer protection legislation[10], and in particular:
  4. (i)dispute resolution mechanisms;
  5. (ii)unfair contract terms; and
  6. (iii)broader consumer rights;
  7. (d)"distance marketing",[11] i.e. online sales;
  8. (e)advertising and e-commerce;[12]
  9. (f)interchange fees;[13]
  10. (g)data protection and cyber security;[14] and
  11. (h)AML and CTF.[15]


3.4.7 In relation to the UK, this is principally due to a combination of the law's incremental development and reform, and the influence of European legislation.


3.4.8 The AFSA already regulates many of the functions set out at 3.4.6 above. For example, mechanisms to ensure the accountability of senior management are provided for in parts 4 and 5 of the FSFR, and the AML and CTF framework in the AIFC closely resembles that of the UK. Where the AFSA wishes for some of these functions to apply to registered payment service providers (such as SPIs, RAISPs and SEMIs), it will need to make specific provision for this in the Framework or by amending the relevant rules. Where there are regulatory gaps, how the AFSA chooses to regulate these areas will be a matter of policy. Specifically, the AIFC's regulatory framework is less mature in relation to consumer protection and data protection. As the scope of the Framework does not include provisions relating to consumer or data protection, the AFSA may wish to seek separate advice on its existing consumer and data protection regulatory regime (potentially to bring it more in line with the UK / EU approach), appreciating that these regimes are likely to apply much more broadly than the remit of this Framework.


[1] As defined at Section 15, FSFR

[2] As defined in Section 6, FSFR

[3] As defined at Section 14, FSFR

[4] Received from AFSA on 13 July 2020

[5] Participants must apply to become a PI if they do not qualify as an SPI (i.e. their actual or projected average turnover in payment transactions is above the prescribed threshold).

[6] If a Participant has an average turnover in payment transactions not exceeding the prescribed threshold, it does not have to apply to be licensed and it can choose instead to be registered as an SPI. Registration would be cheaper and simpler than applying for a full licence.

[7] Payment service providers may agree with business customers (that is, payment service users who are not consumers, small charities or micro-enterprises) to vary the information they provide from that specified in the Framework, and, in certain cases, agree different terms in relation to rights and obligations.

[8] FCA Handbook, Principles for Business (PRIN) and other applicable provisions

[9] FCA Senior Managers & Certification Regime

[10] Consumer Credit Act 1974, Consumer Rights Act 2015, and various statutory instruments

[11] Distance Marketing Regulations 2004

[12] Electronic Commerce (EC Directive) Regulations 2002

[13] Interchange Fee Regulation (EU) 2015/751

[14] General Data Protection Regulation (EU) 2016/679

[15] The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017

4 E-money

4.1 Scope and key concepts


4.1.1 E-money is a digital alternative to cash. It allows users to make cashless payments with money stored on a card or phone, or over the internet.


4.1.2 It is broadly defined as electronically-stored monetary value, represented by a claim on the issuer, issued on receipt of funds for the purposes of making payment transactions, and accepted as a means of payment by a person other than the issuer.


4.1.3 Payment instruments such as debit cards are not e-money because the monetary value is not stored in the device. These payment instruments only contain the data necessary to identify the holder and link the holder to a bank account. Debit cards also enable the holder to make purchases and/or withdraw cash and have those transactions directly and immediately charged to their bank account, whether held with the card issuer or not. At the other end of the scale, e-money also does not include value stored on instruments that can only be used on the issuer's premises, or a limited network of providers providing a limited range of goods and services.


4.1.4 We propose to regulate e-money within the AFSA's existing Regulated Activities regime, as provided for by section 1.1.1 of GEN. Issuing e-money will therefore become a regulated activity as set out at schedule 1 of GEN.


4.1.5 We also propose that EMIs fall within the existing licensing regime under GEN, but that the Framework include a new registration regime for SEMIs to ensure they are regulated. This allows non-bank Participants issuing e-money, but who do not wish to undertake the full range of banking operations, to be able to operate within the e-money market. Similar to the licensing and registration regime in relation to payment services, this will also allow EMIs and SEMIs to be subject to less stringent prudential requirements than banks, reflecting the limited systemic risk they pose as compared to banks. This reflects the principle set out at 3.1.3(b), and has the dual function of opening up the e-money market to new entrants, whilst also ensuring the integrity of existing Participants.


4.1.6 As a result, entities issuing e-money must only do so in accordance with the General Prohibition. The Framework will introduce an exemption to the General Prohibition for SEMIs. As with payment services, Relevant Authorised Firms will be permitted to issue e-money without needing to be specifically licensed as an EMI or registered as a SEMI. This reflects the fact that they are already adequately regulated under FSFR. However, they will require a license which permits them to carry out the Regulated Activity of issuing e-money. As set out in 3.1.6, it should be noted that the MDB Framework policy paper proposes to develop a standalone regulatory and authorisation framework for digital-only banks. It will be important to ensure that the Framework's provisions as to Relevant Authorised Firms (which could include digital-only banks) are consistent with the MDB Framework.


4.1.7 This licensing and registration regime is supplemented by conduct of business rules. These rules are partly laid down specifically in relation to e-money, but are also provided for under the payment services framework. These conduct of business rules regulate:

  1. (a)the issue and redemption of e-money, as set out at 4.3 (these are specific to issuers); and
  2. (b)the payment services aspects of issuers' business, as set out at 3.4. These are the same standards that apply in respect of payment services. 


4.1.8 In regulating e-money, specific concerns arise in relation to the trade-off between restricting e-money issuance to authorised institutions, and therefore protecting users, and opening up the e-money market to competition by reducing the barriers to entry where appropriate (e.g. for lower risk entities). We consider that including EMIs in the existing licensing regime but introducing a new registration regime for SEMIs in the Framework strikes a balance between these two concerns. In particular, the registration regime will provide a more proportionate approach for SEMIs which are not subject to the same requirements where their operations fall below a given threshold. For example, in relation to capital requirements, only SEMIs whose business activities generate (or are projected to generate) average outstanding e-money above a certain threshold (€500,000 in the UK) must hold an amount of initial capital at least equal to 2% of their average outstanding e-money.


4.1.9 Supervisory efforts should also consider the pool of money that EMIs and SEMIs will hold pending redemption of e-money, and how the use (i.e. investment) of this pool should be regulated, as well as safeguards against counterfeiting, money laundering, and terrorist financing.


4.2 Licensing and registration regime


4.2.1 Similar to the licensing and registration regime in relation to payment services set out at 3.2, to issue e-money, the Framework will require Participants to be one of the following:

  1. (a)a Relevant Authorised Firm (see 4.1.6);
  2. (b)a SEMI[1]; or
  3. (c)an EMI[2].


4.2.2 Similar to the concept of a SPI in payment services, a SEMI's business must be projected to generate an average outstanding e-money below a prescribed threshold. In the UK, the total business activities of the applicant immediately before the time of registration as a SEMI must not generate average outstanding e-money that exceeds €5 million. In addition, if the Participant intends to also undertake payment services that are not connected with issuing e-money, its monthly average turnover in relation to these payment services must be less than a prescribed threshold (in the UK, €3 million). The AFSA has confirmed that the equivalent threshold in AIFC will be $5,500,000 USD.


4.2.3 To become a licensed EMI or registered SEMI, a Participant will be required to submit an application to the AFSA and pay a fee. In the UK, these fees range from £250 for re-registration, to £5,000 for a new licence as an EMI. The AFSA has confirmed that the equivalent fees in the AIFC will be $1,000 USD for a SEMI and $3,500 USD for an EMI. As with payment services, the information that must be provided by an applicant Participant will vary depending on whether it is seeking registration or licensing, but may include the information at 3.2.3.


4.2.4 As discussed at 3.2.4, the AFSA may choose to publish guidance or information to assist Participants in making an application for licensing or registration to issue e-money.


4.3 Ongoing requirements


4.3.1 In addition to the registration regime for SEMIs, the Framework will impose requirements on e-money issuers in respect of:

  1. (a)capital requirements, where:
  2. (i)EMIs and SEMIs must carry a prescribed amount of initial capital when applying for licensing or registration (see 3.3.1(a)(i)); and
  3. (ii)EMIs must hold a prescribed amount of ongoing capital, being the greater of the initial capital amount, or 2% of their average outstanding electronic money issued. EMIs will also have to meet the capital requirements in relation to any unrelated payment services aspects of its business;
  4. (b)safeguarding requirements, where all e-money issuers will need to safeguard funds received in exchange for the e-money they have issued, either by way of segregating funds or an insurance-based solution (for further detail on segregating funds see 3.3.1(b)). Where there is an insolvency event for an EMI, the claims of holders of e-money must also be paid from the asset pool of the EMI in priority to all other creditors; 
  5. (c)allowed activities, where EMIs may – in addition to issuing e-money – carry on activities relating to:
  6. (i)providing payment services;
  7. (ii)providing operational and closely related ancillary services, such as executing payment transactions, foreign exchange services;
  8. (iii)operating payment systems; and
  9. (iv)business activities other than issuing electronic money;
  10. (d)reporting and notification requirements, which broadly mirror those set out at 3.3.1(c);
  11. (e)outsourcing and use of agents requirements, which broadly mirror those set out at 3.3.1(d), however with a distinction between distributing and redeeming e-money, which may be outsourced, and issuing e-money, which may not; and
  12. (f)accounting and statutory audit requirements, which broadly mirror those set out at 3.3.1(e).


4.3.2 The reason for the Framework containing the ongoing requirements (rather than by amendment to GEN) is because they will apply to certain non-licensed entities such as SEMIs.


4.3.3 The ongoing requirements in the Framework would apply in addition to any requirements in GEN which apply to EMIs. It will be necessary to consider which (if any) of the rules in GEN ought not to apply to EMIs. Where the AFSA wishes for some of the rules in GEN to apply to SEMIs, it will need to make specific provision for this in the Framework or GEN.


4.3.4 As explained at 3.3.2 above in relation to payment services, we note that the MDB Framework policy paper proposes that the standalone DBR apply to digital-only banks. It will be important to ensure that the DBR do not include provisions that conflict with the Framework in the context of e-money. Presumably, a digital-only bank that issues e-money would be subject to the DBR, but they would also be subject to these ongoing requirements and conduct of business obligations in the Framework (set out in this section 4.3 and below at 4.4).


4.3.5 The MDB Framework policy paper also sets out suggestions concerning security standards (e.g. strong customer authentication), client on-boarding, cybersecurity, business recovery, outsourcing, client terms, authorised status and consumer protection. As set out in relation to payment services at 3.3.5, if the MDB Framework were to contain prescriptive measures concerning these areas, it would be necessary to ensure that they do not conflict with any ongoing requirements or conduct of business obligations imposed on e-money issuers. 


4.4 Conduct of business rules


4.4.1 The conduct of business rules set out at 3.4 above will apply to e-money issuers in relation to the payment services aspects of their business in the AIFC. In addition, the Framework will set out rules that apply to issuing and redeeming e-money (the e-money rules). The reason for the Framework containing the conduct of business rules (rather than by amendment to COB) is because they will apply to certain non-licensed entities such as SEMIs.


4.4.2 The conduct of business rules under the Framework will be in addition to the rules in COB which will apply to EMIs. It will be necessary to consider which (if any) of the rules in COB ought not to apply to EMIs. Where the AFSA wishes for some of the rules in COB to apply to SEMIs, it will need to make specific provision for this in the Framework or COB.


4.4.3 The e-money rules will apply to issuing and redeeming e-money, where this is carried out by a Participant in the AIFC.


4.4.4 On issuing e-money, issuers must do so at par value (i.e. for the same amount as the funds received) when they receive the funds. They must also do so without delay.


4.4.5 On redeeming e-money:

  1. (a)holders of e-money must have the right to redeem the monetary value at any time, and at par value;
  2. (b)the issuer must ensure the contract clearly states the conditions for redemption, including any fees;
  3. (c)any fees charged for redemption must be proportionate to the costs actually incurred by the issuer (for example, the costs of recording and safeguarding e-money would qualify);
  4. (d)the issuer cannot award interest in respect of holding e-money, or award any other benefits that are linked to the length of time that the e-money is held; and
  5. (e)the issuer must allow redemption for up to six years after the contract with the holder of the e-money ends.


4.4.6 In addition to complying with the Framework, the AFSA should consider the extent to which it will require issuers of e-money to comply with other aspects of regulation, such as those outlined in section 3.4.6 in relation to payment service providers. This will primarily be a matter of policy.


[1] If a Participant has average outstanding e-money that does not exceed the prescribed threshold, it does not have to apply to be licensed and it can choose instead to be registered as a SEMI. Registration would be cheaper and simpler than licensing.

[2] Participants must apply to become a licensed EMI if they do not qualify as a SEMI (i.e. their average outstanding e-money exceeds the prescribed threshold).

5 Implementation of the proposed framework

5 Implementation of the proposed framework


5.1 Amendments / effect on existing AIFC legislation


5.1.1 We anticipate that a number of amendments to existing AIFC legislation will be necessary in order to adopt the Framework. The precise scope of these amendments will become clear once the Framework has been drafted. At a high level, the following amendments are likely to be required:

  1. (a)amending the list of Regulated Activities in Schedule 1 of GEN to include "Providing Payment Services" and "Issuing Electronic Money"; 
  2. (b)amending the definition of "Providing Money Services" contained in Schedule 1 of GEN to ensure no inconsistencies with the newly Regulated Activities outlined in 6.1.1(a);
  3. (c)adding the definitions introduced by the Framework to GLO;
  4. (d)adding to the AIFC Fees Rules to reflect any fees that the AFSA may wish to impose upon Participants applying for a licence as a PI or EMI, or a registration as a SPI, SEMI or RAISP;
  5. (e)amending the AIFC Insolvency Rules to reflect the safeguarding requirements set out at 5.3.1(b);
  6. (f)amending the COB; and
  7. (g)amending the provisions relating to outsourcing at GEN 5.2 to reflect the outsourcing requirements at 4.3.1(d) and 5.3.1(e), subject to the precise wording of the Framework.


5.2 Consideration of Kazakh law


5.2.1      We understand that the Framework will be characterised as an AIFC Act[1] and will form part of the Acting Law[2] of the AIFC alongside the Acting Law of the Republic of Kazakhstan, which will apply to Participants to the extent the Constitutional Statute and the AIFC Acts do not apply to certain legal subject matter. The Framework will therefore need to be drafted bearing in mind this potential interaction with existing Kazakh law. For example, certain Kazakh regulations allow for money held in a bank account:

  1. (a)to be withdrawn without the client’s consent – for example, in accordance with a collection order issued by the state revenue authorities, or as expressly provided for by Kazakhstan legislative acts; or
  2. (b)to be arrested based on either a court decision or a resolution of an enforcement officer sanctioned by the prosecutor general.


5.2.2      We appreciate that the AFSA is likely to have previously considered the extent to which provisions of Kazakh law such as those described above should apply to entities operating within the AIFC. Understanding the AFSA's approach in this regard will assist when it comes to drafting the Framework.


[1] As defined in Article 1(4) of the Constitutional Statute

[2] Within the meaning of Article 4(1) of the Constitutional Statute

6 Glossary


Term

Meaning

ACL

Australian Consumer Law

AFSA

Astana Financial Services Authority

ADI

Authorised deposit-taking institution

AIFC

Astana International Financial Centre

AIS

Account information services

AISP

Account Information Service Provider

AML

Anti-money laundering

APRA

Australian Prudential Regulation Authority

ASIC

Australian Securities and Investments Commission

CA

The Corporations Act 2001

COB

Conduct of Business Rules

Constitutional Statute

Constitutional Law of the Republic of Kazakhstan “On the Astana International Financial Centre” No. 438-V dated 7 December 2015 as amended

CTF

Counter-terrorist financing

DBR

AIFC Digital Bank Rules

DPT

Digital payment tokens

EMD2

The second Electronic Money Directive (2009/110/EC)

EMI

Licensed Electronic Money Institution

E-money rules

Framework rules that will apply to issuing and redeeming e-money

EMRs

Electronic Money Regulations 2011

FCA

Financial Conduct Authority

Framework

Regulatory framework for payment services and electronic money in the AIFC

FSFR

AIFC Financial Services Framework Regulations

GDPR

General Data Protection Regulation (EU) 2016/679

GEN

General Rules

GLO

Glossary

MAS

Money Authority of Singapore

MDB Framework

AIFC Framework for Mobile and Digital Banking Services

Participant

An AIFC Participant, as defined in Article 1(5) of the Constitutional Statute.

PDPA

Personal Data Protection Act 2012

PI

Licensed Payment Institution

PIS

Payment initiation services

Privacy Act

Privacy Act 1988

PSA

Payment Services Act 2019

PSD2

The second Payment Services Directive ((EU) 2015/2366)

PSRA

Payment Systems (Regulation) Act 1998

PSRs

Payment Services Regulations 2017

RAISP

Registered Account Information Service Provider

RBA

Reserve Bank of Australia

Relevant Authorised Firms

Participants who are authorised to carry out the regulated activities of Islamic Banking Business, Accepting Deposits, Providing Credit, and Providing Money Services

SEMI

Registered Small Electronic Money Institution

SPI

Registered Small Payment Institution

The Code

ePayments Code


Schedule 1 – Policy issues (major)



Policy issue identified by AFSA for consideration

AFSA's policy decision

1

Would it be acceptable to regulate payment services separately from the AIFC's existing "Regulated Activity" regime?

(section 4.1.4 of the policy paper)


·Payment services will be included in the list of Regulated Activities in Schedule 1 of GEN.

·Separate AIFC Rules will be prepared which provide the details of the Framework.

·Activities that are included in existing the Regulated Activity of “Providing Money Services” will be defined and regulated under the separate AIFC Rules for the PSEM Framework.

2

What should be the turnover threshold for a Participant to be able to apply for registration as a SPI?

(section ‎4.2.2 of policy paper)


·The threshold will be 3,500,000 USD per month, meaning that if a Participant has an actual or projected average turnover in payment transactions below the threshold of 3,500,000 USD per month, it can apply to be registered as an SPI.

3

What should be the projected average outstanding e-money threshold for a Participant to be able to apply for registration as a SEMI?

(section ‎5.2.2 of policy paper)


·The threshold will be 5,500,000 USD, meaning that if a Participant's business activities (immediately before the time of its registration application) generate average outstanding e-money below the threshold of 5,500,000 USD, it can apply to be registered as an SEMI.


Schedule 2 - Policy issues (non-major)

Schedule 1- Policy issues (non-major)

#

Policy issue identified by AFSA for consideration

AFSA's policy decision

1

What should be the application fees to become an authorised PI or a registered SPI?

(section 4.2.3 of policy paper)

·The application fees to become a registered SPI will be 1,000 USD and to become an authorised PI will be 3,500 USD.

·If an SPI no longer meets the requirements to qualify as a SPI, but intends to continue providing payment services, it will be required to apply for authorisation as a PI. There will not be any other more streamlined / shortened process for transitioning from a registered SPI to an authorised PI.

2

What should be the application fees to become an authorised EMI or registered SEMI?

(section 5.2.3 of policy paper)

·The application fees to become a registered SEMI will be 1,000 USD and to become an authorised EMI will be 3,500 USD.

·If an SEMI no longer meets the requirements to qualify as a SEMI, but intends to continue providing payment services, it will be required to apply for authorisation as an EMI. There will not be any other more streamlined / shortened process for transitioning from a registered SEMI to an authorised EMI.

3

What should be the prescribed amount of ongoing capital that electronic money issuers must hold?

(section 5.3.1(a)(ii) of policy paper)

·EMIs will be required to hold a prescribed amount of ongoing capital, being the greater of the initial capital amount, or 2% of their average outstanding e-money issued. The initial capital amount for EMIs will be expressed in USD, and be approximately equivalent to €350,000.

·SEMIs will be subject to an initial capital requirement of 2% average outstanding e-money issued, where their business activities generate (or are projected to generate) average outstanding e-money over a prescribed threshold. The prescribed threshold will be expressed in USD, and be approximately equivalent to €500,000.SEMIs that are subject to this initial capital requirement will also be required to continue to meet this requirement on an ongoing basis (unless their level of business falls below the prescribed threshold).


Consultation Paper on Proposed amendments to the AIFC Insurance and Reinsurance Prudential Rules

Introduction

1.The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed amendments to the AIFC Insurance and Reinsurance Prudential Rules (PINS).

2.The proposals in this Consultation Paper will be of interestto current and potential AIFC participants who are interested in exercising business activities in or from the AIFC as captive insurers and insurance managers.

3.All comments should be in writing and sent to the address or email specified below. If sending your comments by email, pleaseuse “Consultation PaperAFSA- P-CE-2020-0010” in the subject line. You may,if relevant, identifythe organisation you represent when providing your comments. The AFSA reserves the right to publish, includingon its website, any commentsyou provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4.The deadline for providing comments on the proposals is 12 December 2020. Prior to this consultation paper the AFSA published the policy paper on Enhancement of the AIFC Regulatory Framework for Captive Business, which included same proposals at policy level.

5.Once we receive your comments, we shall consider if any refinements are required to this proposal.

6.Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA) 55/17 Mangilik El, building C3.2, Kazakhstan or emailed to: consultation@afsa.kz

7.The remainder of this Consultation Paper contains the following:

(a)Background to theproposal

(b)Annex 1: Proposed Amendments to the AIFC Insurance and Reinsurance Prudential Rules.

Background

1.A captive insurance is a risk management vehicle used by companies to cover risks that cannot be efficiently insured in the market or to manage risks in a more cost-effective manner. Captive insurers mainly underwrite risks related to or arising out of the businessor operations of the groupto which they belong or third- party risks arising in related businesses.

2.Captive insurance allows a company to insure its industry-specific risks which would otherwise be overpriced by commercial insurers. The cost savings would result not only from a more tailored risk assessment but also from avoidance of marketing and administration costs. In addition, captives are uniquely positioned to manage their own risks as they can make more precise forecasts based on their own historical data as opposed to commercial insurers who rely on industry averages.

3.The following summarizes the proposed amendments to the AIFC Insurance and Reinsurance Prudential Rules (PINS) that aim to provide a competitive and clear risk-based regulation for full-fledged and effective operation of captive insurers.

(1)Introduce three classes of captive insurers differentiating on the amount of third-party risk allowed to be written.

(2)Set prudential requirements for each class of captive insurers based on the level of risk the scope of their license assumes.

(3)Explicitly state that an AIFC captive insurer can be either self-managed or managed by an AIFC insured Insurance Manager

(4) Expand the functions of the AIFC Captive Insurance Managers.

As a result of introduction of these changes, AFSA aims to further develop the insurance market in the AIFC and Kazakhstan.

4.The key objectives of the proposed amendments include:

-Make the AIFC jurisdiction suitable for different types of captive insurers;

-Increase the numberof captive insurersand insurance managersin the AIFC;

-Alignment of captive insurance classification with international standards;

-Add clarification and precision to the requirements to captive insurance managers.

5.Annex 1 includes the proposed Amendments to the AIFC Insurance and Reinsurance Prudential Rules.

Annex 1

Proposed amendments to the AIFC Insurance and Reinsurance Prudential Rule

In these Rules the underlying indicates a new text and the strikethrough indicates a removed texT

14Captive Insurers

14.1 Introduction

14.1.1Definition of Captive Insurer

A Captive Insurer is an Authorised Firm with a Licence to carry on Insurance Business as a Class 1, Class 2 or Class 3 Captive Insurer only for the business or operations of the Group to which it belongs.

14.1.1-1. Classification of Captive Insurer

(1)  A class 1 Captive Insurer is an AIFC Captive Insurer that is permitted under the conditions of its authorisation to effect or carry out Contracts of Insurance only for risks related to or arising out of the business or operations of the group to which the Insurer belongs.

(2)  A class 2 Captive Insurer is an AIFC Captive Insurer that is permitted under the conditions of its authorisation to obtain no more than 20% of its gross written premium from third-party risks arising from business or operations that are closely linked to the business or operations of the group to which the Insurer belongs.

(3)A class 3 Captive Insurer is an AIFC Captive Insurer that:

(a)is permitted under the conditions of its authorisation to effect or carry out Contracts of Insurance only for risks related to or arising out of the business or operations of persons who engage in similar, related or common:

i.businesses; or

ii.activities; or

iii.trade; or

iv.services; or

v.operations; and

(b)is owned by the persons mentioned in paragraph (i) or by a body corporate of which all such persons are members such as group captives.

14.1.2Definition of Captive Insurance Business

(1) Captive Insurance Business is the business of Effecting or Carrying out Contracts of Insurance as a Class 1, Class 2 or Class 3 Captive Insurer only for the business or operations of the Group to which the Captive Insurer belongs.

(2) General Captive Insurance Business is Captive Insurance Business in relation to General Insurance Contracts

(3) Long-Term Captive Insurance Business is Captive Insurance Business in relation to Long-Term Insurance Contracts.

14.1.3 Captive Insurer to be incorporated in the AIFC

(1) Only an Authorised Firm which is incorporated under the laws of the AIFC may apply to the AFSA for a Licence to conduct Captive Insurance Business.

(2) A Captive Insurer may either be self-managed or managed by an Insurance Manager authorised by AFSA.

14.3 Application of PINS to Captive Insurers

14.3.1Application of PINS 2 (Systems and Controls)

(1) A Captive Insurer must comply with the requirements of PINS 2 (Systems and Controls) in full subject to (2).

(2) A Captive Insurer may appoint an Insurance Manager authorised by AFSA to perform the Controlled Function of Senior Executive Officer provided that such Employee is an Approved Individual and the Designated Function of Money Laundering Reporting Officer.

14.3.2 (…)

14.3.3 (…)

14.3.4 (…)

14.3.5 (…)

14.3.6 (…)

14.3.7 (…)

14.3.8 (…)

14.3.9 (…)

14.3.10 (…)

14.3.11 (…)

14.3.12 Application of PINS 13 (Prudential Returns)

(1)  A Captive Insurer must comply with PINS 13 (Prudential returns) in full.

(2)Unless required otherwise by AFSA in writing, Class 1 Captive Insurer may submit Prudential Returns semi-annually instead of quarterly as stated in Schedule 6.

14.4Capital adequacy requirements for Captive Insurers

14.4.1Minimum Capital Requirement (MCR) for a Captive Insurer

(1)For the purposes of Schedule 4 of PINS, the Capital Floor for a Captive Insurer is the highest of the following:

(a) US$150,000 for a Captive Insurer carrying on General Captive Insurance Business;

(b) US$150,000 for a Captive Insurer carrying on Long-term Captive Insurance Business; or

(c)an amount specified in writing by the AFSA. (d) the Base Capital Requirement;

(e)he Premium Risk Component;

(f)the Technical Provision Risk Component.

(2)  Base Capital Requirement (BCR) for a Captive Insurer is

(a)US$100,000 for a Class 1 Captive Insurer;

(b)US$200,000 for a Class 2 Captive Insurer;

(c)US$300,000 for a Class 3 Captive Insurer.

(3)  Premium Risk Component for a Captive Insurer

(a) The Premium Risk Component for a Class 1, Class 2 or Class 3 Captive Insurers conducting general insurance business or life insurance business is the amount calculated in accordance with the following formula:

[18% ´ firm’s net written premium up to US$ 5 million]+

[16% ´ firm’s net written premium in excess of US$ 5 million]

(4)  Technical Provision Risk Component for a Captive Insurer

(a)The Technical Provision Risk Component for a Class 1, Class 2 or Class 3 Captive Insurers conducting general insurance business is the amount calculated in accordance with the following formula:

[5% ´ firm’s net claims reserve under general Contracts of Insurance]-

[15% ´ the amount of firm’s reinsurance and other recoveries expected to be received in respect of those claims]

(b)The technical provision risk component for a Class 1, Class 2 or Class 3 Captive Insurers conducting long-term insurance business is the amount calculated in accordance with the following formula:

[2.5% ´ Policyholder liabilities calculated using actuarial methods for long-term insurance]

14.4.2 (…)

14.4.3Prescribed Capital Requirement for a Protected Cell Company

(1) Class 1, Class 2 and Class 3 Captive Insurers are not required to calculate Prescribed Capital Requirement;

(2) For a Protected Cell Company each Cell of a Protected Cell Company must calculate its Prescribed Capital Requirement in accordance with PINS 5.2.3 (Obligation to calculate PCR) as if it were a stand-alone Insurer.

14.4.4 (…).

Consultation Paper on Proposed Approach on the Application of the AIFC regulatory fees

Introduction

1.The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to seek suggestions from the market on the proposed approach on the application of the AIFC regulatory fees.

2.The proposals in this Consultation Paper will be of interestto current and potential AIFC participants who are interested in exercising business activities in or from the AIFC.

3.All comments should be in writingand sent to the addressor email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P- CE-2020-0009” in the subject line. You may, if relevant,identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4.The deadline for providing comments on the proposals is 20 December 2020. Once we receive your comments, we shall consider if any refinements are required to this proposal.

5.Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El, building C3.2, Kazakhstan or emailed to: consultation@afsa.kz

6.The remainder of this Consultation Paper contains the following:

(a)Background to theproposal;

(b)Key proposals on the application of the AIFC regulatory fees;

(c)Annex 1: Proposed supervision fees tables.


Background

1.AFSA have not been applying application fees for authorisation and recognition as well as supervision fees, stipulated by the AIFC Fees Rules (FEES). This proposal comes as AIFC is approaching the end of waiver for application fees granted in June 2018 expiring on 1 January 2021.

2.There are two types of supervision fees in FEES: initial annual supervision fee and subsequent standard annual supervision fees.

3.According to FEES, initialannual supervision fee must be paid for the initialperiod of regulation after the grant of licensed status. The initial annual supervision fee is calculated as the fee which was payable at the time of application for authorisation, pro-rated over the whole months remaining between the date of authorisation and the end of the year.

4.Subsequent annual supervision fees must be paid for any period of regulation after the period described above. The standard annual supervision fee is:

(i)the highest of the fees specified in the fees table corresponding to the activities which the relevant entity is licensed to carry on; and

(ii)an amount as may be determined by the AFSA for each Approved Individual employed by the relevant entity at 30 September in the previous year, or on the date of the grant of authorisation, whichever is the later.

5.The proposed approach on the application of the AIFC regulatory fees is discussed in the next section of this document. Annex 1 includes the proposed supervision fees tables.


Key proposals on the application of the AIFC regulatory fees

1.    With the focus on the currentdevelopment stage of the AIFC, it is proposed to remove authorisation and recognition application fees and introduce only annual supervision fees that will take effecton 2021 and will be applied after1 year from the AIFC entity’s commencement of operations. Annex 1 sets out the proposed supervision fees.

2.    This proposal does not require upfront payments for new potential participants and maintains the AIFC attractiveness. This proposal also allows the AIFC participants to operate 1 year without supervision fees further increasing the ease of setting up a business in the AIFC.

3.    For existing AIFC participants, the proposal is to apply supervision fees starting from 2021 if such participants have been operational for more than 1 year. For those companies that have not yet commenced operations, the supervision fees will be applied after 1 year from their commencement of operations. Therefore, the application of supervision fees includes the “commencement of operations” ratherthan the “date of a Licence” since the AIFC entity may obtain a Licence but do not commence its operations in the AIFC.

4.Additionally, thereare proposals to introduce the following fees starting from 2021 that were not earlier introduced:

(a)  fees at the level of 50% of the revised fees in Annex 1 for post-authorisation processes such as applications to vary the scope of a Licence;

(b)in an amount of 300 USD for withdrawal of a Licence; and

(c)in an amount of 50 USD for modification and withdrawal of Approved Individual’s registration.

5.    It is proposed to waive all fees, including authorisation and supervision fees, for FinTech Lab participants until further notice from AFSA.

6.    Proposed supervision fees in Annex1 are based on currentapplication fees set out in Schedules 1-4 of FEES by applying to them risk-based approach and reducing them noting the nature, scale and complexity of businesses. Therefore, the proposed reductions are:

(a)90% for AIFC Participants not holding Client Money/Asset and with the lowest Base Capital Requirements;

(b)50% for other AIFC Participants not holding Client Money/Asset;

(c)   20% for AIFC Participants holding Client Money/Asset;

(d)20% for Ancillary Service Providers, Authorised Market Institutions and entities for recognition regime.

Annex 1

1. Proposed supervision fees for Regulated Activities

90% reduction is proposed for the following AIFC Participants not holding Client Money/Asset and with the lowest Base Capital Requirements:

Application fee by Regulated Activities

Fee (USD)

Revised Fee (USD)

Advising on Investments

5000

500

Arranging Deals in Investments

5000

500

Insurance Intermediation

5000

500

Advising on a Credit Facility

5000

500

Arranging a Credit Facility

5000

500

Providing Insurance Management

5000

500

50% reduction is proposed for the following AIFC Participants not holding Client Money/Asset:

Application fee by Regulated Activities

Fee (USD)

Revised Fee (USD)

Operating a Representative Office

3000

1500

Providing Trust Services (where an

Authorised Firm is not acting as trustee in respect of an express trust and does not hold clients’ money)


n/a


2500

Providing Islamic Financing, in case if only own funds are used

10000

5000

Providing Money Services

5000

2500

Operation of a Payment System

5000

2500

20% reduction is proposed for AIFC Participants holding Client Money/Asset:

Application fee by Regulated Activities

Fee (USD)

Revised Fee (USD)

Managing a Collective Investment Scheme

5000

4000

Arranging Custody

5000

4000

Providing Fund Administration

5000

4000

Managing Investments

5000

4000

Providing Custody

5000

4000

Providing Trust Services

5000

4000

Acting as the Trustee of a Fund

5000

4000

Dealing in Investments as Agent

10000

8000

Dealing in Investments as Principal

10000

8000

Managing a Restricted Profit Sharing Investment Account

10000

8000

Islamic Banking Business

15000

12000

Providing Islamic Financing, in case if not only own funds are used

n/a

8000

Accepting Deposits

15000

12000

Providing Credit

10000

8000

Conducting Insurance Business

10000

8000

Conducting Takaful Business

10000

8000

Conducting Captive Insurance Business through a Protected Cell Company

5000 plus 1000 for each cell

4000 plus 800 for each cell

Conducting Captive Insurance Business other than through a Protected Cell Company

5000

4000


Conducting  Captive  Takaful  Business                    through  a Protected Cell Company

5000 plus 1000 for each cell

4000 plus 800 for each cell

Conducting Captive Takaful Business other than through a Protected Cell Company

5000

4000

Opening and Operating Bank Accounts

5000

4000

2.Proposed supervision fees for Market Activities

20% reduction is proposed for AIFC Participants carrying on Market Activities:

Application fee by Market Activities

Fee (USD)

Revised Fee (USD)

Operator of a Clearing House

125 000

100 000

Operator of an Investment Exchange

125 000

100 000

Operator of a Digital Asset Trading Facility

5 000

4000

Operator of a Crowdfunding Platform

5 000

4000

Operating a Multilateral Trading Facility

5 000

4000

Operating an Organised Trading Facility

5 000

4000

Operating a Private Financing Platform

5 000

4000

3.Proposed supervision fees for Ancillary Services

20% reduction is proposed for AIFC Participants providing Ancillary Services

Activity

Fee (USD)

Revised Fee (USD)

Providing Legal Services

2 000

1600

Providing Audit Services

2 000

1600

Providing Accountancy Services

2 000

1600

Providing Consulting Services

2 000

1600

Providing Credit Rating Services

2 000

1600

4. Proposed supervision fees for Recognised Non-AIFC Market Institution and Recognised Non-AIFC Member

20% reduction is proposed for Recognised Non-AIFC Market Institution and Recognised Non- AIFC Member

Application fee

Fee (USD)

Revised Fee (USD)

Recognised Non-AIFC Market Institution

2 000

1600

Recognised Non-AIFC Member

2 000

1600

Consultation Paper on Proposed Enhancement of AIFC Regulatory Framework for Captive Business

Introduction

1.  The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed policy for captive insurance business.

2.  The proposals in this Consultation Paper will be of interest to current and potential AIFC participants who are interested in exercising business activities in or from the AIFC.

3.  All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P-CE-2020- 000X” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including on its website, any comments you provide, unlessyou expressly requestotherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4.  The deadline for providing comments on the proposals is 25 November 2020. Once we receive your comments, we shall considerif any refinements are requiredto this proposal.

5.  Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA) 55/17 Mangilik El, building C3.2, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +8 7172 613781

6.The remainder of this Consultation Paper contains the following:

(a)Background to the proposal

(b)    Annex 1: Policy paper on Enhancing the Regulatory Framework on Captive Insurance Business

Background

1.A captive insurance is a risk management vehicle used by companies to cover risks that cannot be efficiently insured in the market or to manage risks in a more cost-effective manner. Captive insurersmainly underwrite risksrelated to or arising out of the business or operations of the group to which they belong or third-party risks arising in related businesses.

2.Captive insurance allows a company to insure its industry-specific risks which would otherwise be overpriced by commercial insurers. The cost savings would result not only from a more tailored risk assessment but also from avoidance of marketing and administration costs. In addition, captives are uniquely positioned to manage their own risks as they can make more precise forecasts based on their own historical data as opposed to commercial insurers who rely on industry averages.

3.The following summarizes the proposed amendments to the AIFC Insurance and Reinsurance Prudential Rules (PINS) that aim to provide a competitive and clear risk- based regulation for full-fledged and effective operation of captive insurers.

(1)Introduce three classes of captive insurersdifferentiating on the amount of third-party risk allowed to be written.

(2)Set prudential requirements for each class of captive insurers based on the level of risk the scope of their license assumes.

(3)Explicitly state that an AIFC captive insurer can be either self-managed or managed by an AIFC insured Insurance Manager

(4)Expand the functions of the AIFC Captive Insurance Managers.

(5)Provide AIFC Guidance on Captive InsuranceBusiness aimed at providing guidance to potential and licensedAIFC captive insurersand insurance managersand includes a generaloverview of captiveinsurance business, classesof captives, responsibilities and expectations to Insurance Managers or Captive Insurers (in case self-managed) for managing a captive insurance business. This Guidance will be designed to be read in conjunction with all other relevant AIFC rules.

4.As a result of introduction of these changes,AFSA aims to further developthe insurance market in the AIFC and Kazakhstan.

5.   The key objectives of the proposed amendments include:

-Make the AIFC jurisdiction suitable for different types of captive insurers;

-Increase the number of captive insurers and insurance managers in the AIFC;

-Alignment of captive insurance classification with international standards;

-Add clarification and precision to the requirements to captive insurance managers;

-Provide additional guidance document describing high level information for captive insurers and insurance managers.

6.Annex 1 includes the Policy paper on Enhancing the Regulatory Framework on Captive Insurance Business in the AIFC.

Annex 1

POLICY PAPER ON ENHANCING THE REGULATORY FRAMEWORK FOR CAPTIVE BUSINESS IN THE AIFC

Consultation Paper on Proposed Enhancement of the AIFC Regulatory Framework for Representative Offices

Introduction

1.The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite publiccomments on the proposed amendments to the AIFC Regulatory framework for Representative Offices.

2.The proposals in this Consultation Paper will be of interestto current and potential AIFC participants who are interested in exercising business activities in or from theAIFC.

3.All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P-CE-2020- 0006” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reservesthe right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supportedby reasoning and evidence will be given more weightby the AFSA.

4.The deadline for providing comments on the proposals is 4 November 2020. Once we receive your comments, we shall consider if any refinements are required to this proposal.

5.Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA) 55/17 Mangilik El, building C3.2, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +8 7172 613781

6.The remainder of this Consultation Paper contains the following:

(a)Background to the proposal

(b)Annex 1: Draft of the proposed amendments to the AIFC Pre-IPO Listing Rules

Background

1.  The scope of Representative Office’s includes:

(a)marketing activities;

(b)activities that increase the profile, in the AIFC, of the Representative Office's head office;

(c)activities that relate to correspondence with or the provision of information from the Representative Office's head office;

(d)activities that relate to the provision of information to the Representative Office's head office relating to business trends, business opportunities and developments in the AIFC markets;

(e)any other activities that the AFSA determine may be suitable for a Representative Office to conduct.

2.The proposed amendments to existing legal framework aim to provide market expansion opportunities and streamline the existing processesof Representative Officeregistration, namely:

1)  Exempt Representative Offices from the requirement to assign Senior Executive Officer (SEO), Money Laundering ReportingOfficer (MLRO), FinanceOfficer (FO) and Compliance Officer (CO). Instead, allow these functions (except MLRO) to be conducted by Principal Representatives, persons assigned to manage Representative Offices.

2)  Exempt Representative Officesfrom the obligation to comply with the requirements of the AIFC Anti-Money Laundering, Counter-Terrorist Financing and Sanction Rules (AML) as these requirements are not proportionate to the nature of activities conducted by Representative Offices.

3)  Allow Principal Representatives, persons assigned to manage Representative Offices, to be non-residents ofKazakhstan.

3.   The key objectives of the proposed amendments include:

-streamline the registration process of Representative Offices

-create market expansion opportunities for Representative Offices

-create an opportunity for potential Authorised Firms to test the AIFC market and jurisdiction by registering first as a Representative Office.

4.Annex 1 describes the proposed amendments to the AIFC General Rules, AIFC Representative Office Rules and AIFC Anti-Money Laundering, Counter Terrorist Financing and Sanctions.

Proposed amendments to the AIFC Rules regarding Representative Offices

In these Rules the underlying indicates a new text and the strikethrough indicates a removed text

Rule: AIFC General Rules

CONTROLLED AND DESIGNATED FUNCTIONS

2.1.Mandatory appointments

2.1.1.  Appointments to be filled by Approved Individuals

(1)Subject to (2) an Authorised Person, must make the following appointments and ensure that they are held by one or more Approved Individuals at all times:

(a)Senior Executive Officer;

(b)Finance Officer; and

(c)Compliance Officer

(2)For an Authorised Person Operating a Representative Office the mandatory appointments in

(1) may be carried on by its Principal Representative.

2.1.2.Appointments to be filled by Approved Individuals or Designated Individuals

(1)An Authorised Person, except for an Authorised Person Operating a Representative Office, must make the following appointments and ensure that they are held by either an Approved Individual or a Designated Individual at alltimes:

(a)Money Laundering Reporting Officer; and

(b)such other role or function as the AFSA may direct from time to time.

(2) …

Rule: AIFC Representative Office Rules

3.4. Principal Representative

(1)A Representative Office must at all times have a Principal Representative who (a) is resident in Kazakhstan; and

(b) has satisfied the AFSA as to his/her fitness and propriety. The AFSA may give a Representative Officewritten notice that a PrincipalRepresentative is not fit and proper if the AFSA makes such a determination.

(2)If:

(a)the Principal Representative ceases to be an employee of the Representative Office; or

(b)the Representative Office receivesthe notice describedin REP 3.4(1)(b), the Representative Office must designate a replacement PrincipalRepresentative as soon as possibleafter, and in any event within 28 days of, either the Principal Representative's departure in REP 3.4(2)(a) or the Representative Office'sreceipt of the notice mentionedin REP 3.4(1)(b). The

AFSA may revoke a Representative Office's Licence if they fail to follow the procedure outlined in REP 3.4(2).

Rule: AIFC Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Rules

2.APPLICATION

2.1.Application

(a)The AML Rules apply to:

(i)every Relevant Person in respect of all its AFSA regulated or supervised activities except an Authorised Firm licenced to operate a Representative Office; and

(ii)the persons specified in AML 2.2 as being responsible for a Relevant Person's compliance with these Rules.

(b)For the purposes of these Rules, a Relevant Person means:

(i)an Authorised Firm;

(ii)an Authorised Market Institution;

(iii)a DNFBP; or

(iv)a Registered Auditor.

Consultation paper on the proposed amendments to the AIFC Pre-IPO Listings Rules

Introduction

1.The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed amendments to the AIFC Pre- IPO Listings Rules.

2.The proposals in thisConsultation Paper will be of interest to current and potential AIFC participants who are interested in exercising business activities in or from the AIFC.

3.All comments should be in writingand sent to the addressor email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P- CE-2020-0005” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4.The deadline for providing comments on the proposals is 16 October 2020. Once we receive your comments, we shall consider if any refinements are required to this proposal.

5.Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El, building C3.2, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +8 7172 613781

6.The remainder of this Consultation Paper contains the following:

(a)Background to theproposal

(b)Annex 1: Draft of the proposed amendments to the AIFC Pre-IPO Listing Rules

Background

1.According to the AIFC Strategy 2025, developing a securities market in the Republic of Kazakhstan and integrating it with international capital markets are the key objectives of the AIFC. AIFC shall become the country’s core platform for attracting portfolio investments, conducting IPO/SPO of large national and private companies. While furtherissuance and placement of corporate and public sectors financial instruments will be continued, raisingdemand from frontierand emerging markets in willingness to invest, shall also be fulfilled by provision of appropriate financial instruments.

2.The AIFC Pre-IPO Listings Rules were developed in 2018 with the aim to allow the admission of the Shares of an Issuer to an Official List maintained by an Authorised Investment Exchange, without the Issuer immediately carrying out an initial public offering of Shares and seeking their admission to trading on the Authorised Investment Exchange.

3.According to the AIFC Glossary, the Shares and Certificate over Shares are equity securities. A Share is a share or stock in the share capital of any Body Corporate or any unincorporated body (excluding a Unit). A Certificate over Shares is an instrument which confers on the holder contractual or property rights to or in respect of a Share held by a Person and the transferof which may be effectedby the holder without the consent of that other Person.

4.The common ways for issuers to raise equity capital is to offer shares and/or certificates representing shares. While shares in most of the cases can only be traded in local currency and on local exchanges, certificates allow issuers to list their securities in foreign currencies and on foreign exchanges and reach out to wider investor base. The certificates help to increase global trade, which in turn can help increase not only volumes on local and foreign markets but also the exchange of information as well as market transparency.

5.In order to apply the AIFC Pre-IPOrules in its entirety to Certificates over Shares, it is proposed to introduce an amendment in the AIFC Pre-IPO Listings Rules by adding “(or Certificates over Shares”)” after“Shares”.

6.The key objectives of the proposed amendments to the AIFC Pre-IPO Rules are as follows:

-clarification of the AIFC regulatory framework;

-attraction of new issuers and market participants to the AIX Market;

-greater exposure to the global marketfor issuers, extension of international shareholder base;

-diversification ofinvestments.

7.Annex 1 describesthe proposed amendments to the AIFC Pre-IPO ListingsRules.

Annex 1

Proposed amendments to the AIFC Pre-IPO Listings Rules

In these Rules the underlying indicates a new text

Guidance: Purpose and application of these Rules

The purpose of these Rules is to compliment AMI in relation to Pre-IPO Listings in the AIFC.

1. Application and Scope

(1)These Rules apply within the jurisdiction of the AIFC.

(2)The following do not apply in the case of a Pre-IPO Listing:

(a)Sections 66(3), 82(1) and 83(1) of the Framework Regulations; and

(b)Sections 86(a) through (c) of the Framework Regulations, provided that the Issuer complies with the requirements of the Listing Rules of the Authorised Investment Exchange as prescribed by Sections 4 and 5 of these Rules;

(c)MAR, in its entirety; and

(d)any Takeover Rules prescribed by the AFSA under Section88 of the Framework Regulations outside of MAR, unless such Rules specifically state that they apply in the case of a Pre-IPO Listing.

2. Interpretation

(1) For purpose of these Rules, a “Pre-IPO Listing” means the admission of the Shares (or Certificates over Shares) of an Issuer to an Official List maintained by an Authorised Investment Exchange, without the Issuer immediately carrying out an initial public offering of Shares (or Certificates over Shares) and seeking their admission to trading on the Authorised Investment Exchange.

3. Rules applicable to Authorised Investment Exchange

(1)Subject to the requirements of this section 3, an Authorised Investment Exchange may include Pre-IPO Listings under a subheading of its Official List.

(2)Without limitation of any other applicable requirements of AMI 3.6, an Authorised Investment Exchange that wishes to permit Pre-IPO Listings must include the following requirements in its Listing Rules:

(a)procedures for admission of Shares (or Certificates over Shares) to its Official List as a Pre-IPO Listing, including:

i.requirements to be met before Shares (or Certificates over Shares) may be granted admission to an Official List as a Pre-IPO Listing; and

ii.agreements in connection with admitting Shares (or Certificates over Shares) to an Official List as a Pre-IPO Listing;

(b)procedures for suspension and delisting of Shares (or Certificates over Shares) from an Official List as a Pre-IPO Listing; and

(c)requirements for disclosure to the markets of such information as the

Authorised Investment Exchange, in consultation with the AFSA, deems appropriate in lieu of the disclosure requirements of section 83(1) of the Framework Regulations and MAR.

(3)For purposes of 3(2)(c), the Listing Rules must prescribe the type of information and the circumstances and manner in which such information must be disclosed including:

(a)financial information; and

(b)any other information or material changewhich occurs in relation to the Issuer.

(4)A prominent warning, approved by the Authorised Investment Exchange, shall accompany each release of the information disclosed, regarding the nature and purpose of such information, including without limitation that

(a)certain regulatory requirements and protections applicable to Shares (or Certificates over Shares) admitted to trading on an Authorised Investment Exchange do not apply to a Pre-IPO Listing, including sections 82(1) (corporate governance), 83(1) (market disclosure) and 86(a) through (c) (insider information) of the AIFC Financial Services Framework Regulations, and the AIFC Market Rules in their entirety; and

(b) the information being disclosed (i) is provided solely for purposes of a Pre-IPO Listing; (ii) does not include key information customarily used for making investment decisions; (iii) is not a substitute for investment research,due diligence or advice;and (iv) is used by an investorfor investment decision-making purposes solely at the investor’s own risk.

Consultation Paper on Proposed Enhancement of AIFC Market Institutions Framework

Introduction

1.The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to seek suggestions from the market on ways to enhance AIFC Market Institutions framework.

2.The proposals in this Consultation Paper will be of interest to current and potential issuers on AIFC Authorised Investment Exchange, AIFC participants who are interested in exercising business activities in or from the AIFC, Recognised Non-AIFC Members as well as investors and other interested parties.

3.We invite comments from interested stakeholders on the following proposed amendments to the AIFC Authorised Market Institutions Rules (AMI):

(a)clarification on securities settlement finality provisions;

(b)alignment of the outsourcing requirement in AMI with the requirement in AIFC General Rules;

(c)clarification on the requirement for Direct Electronic Access Rules;

(d)guidance on the definition of service of process and the role of an agent for service of process;

(e)alignment of the notification requirement to admit Securities or Units to the Official List with the existing AFSA Waiver and Modification Notice and alignment of submitting audit financial reports requirement in AMI with the requirement in AIFC General Rules.

4.All comments should be in writingand sent to the addressor email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P- CE-2020-0008” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

5.The deadline for providing comments on the proposals is 19 December 2020. Once we receive your comments, we shall consider if any refinements are required to this proposal.

6.Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El, building C3.2, Kazakhstan

or emailed to: consultation@afsa.kz Tel: +8 7172 613741

7.The remainder of this Consultation Paper contains the following:

(a)Background to theproposal;

(b)Annex 1: Proposed Amendments to the AIFC Authorised Market Institutions Rules.


Background

1.According to Article 2 of the Constitutional Statute of the Republic of Kazakhstan On the Astana International Financial Centre (the “Constitutional Statute”), the purpose of the AIFC is to establish a leading international centre for financial services. The objectives of the AIFC are as follows:

(1)attracting investment into the economy of the Republic of Kazakhstan by creating an attractive environment for investment in the financial services sphere;

(2)developing a securities market in the Republic of Kazakhstan and integrating it with international capital markets;

(3) developing insurance markets, banking services, and Islamic financing, in the Republic of Kazakhstan;

(4)developing financial and professional services based on international best practice;

(5) achieving international recognition as a financial centre.

2.Further development of the AIFC requires the enhancement of regulatory framework for market institutions to best meet the region specificities and the market needs.

3.Enhancing AIFC Market Institutions Framework envisages the following:

1)Enhancing the securities settlement finality framework in the AIFC;

2)Introducing miscellaneous enhancements in AMI with regards to:

•Outsourcing arrangement;

•Direct Electronic Access Rules;

•Agent for service of process;

•Reporting and notification requirements.

4.On settlement finality framework in the AIFC, the amendments are needed for establishing international interoperable links and attracting foreign investment by the Authorised Investment Exchange in the AIFC. The amendments on securities settlement finality provisions have been developed based on the best practices deployed in the European Union, United Kingdom, Australia, New Zealand and Dubai International Financial Centre.

5.Other miscellaneous amendments are aimed at alignment of requirements and providing additional clarification and guidance. Thus, the amendments will reflect practical experience of the Authorised Investment Exchange in the AIFC in implementing AMI and the evolving external environment (e.g., unavailability of Direct Electronic Access; period for notification of AFSA in respect of Public Listings and Exempt Offer Listings), clarify certain requirements (e.g., process agent appointment and submission of annual financials by AMI to AFSA). The

introduction of changes to AMI will result in clearer and more explicit statement of rules that are already in effect.

6.Annex 1 includes the proposed amendments to the AIFC Authorised Market Institutions Rules.


Annex 1

Proposed amendments to the AIFC Authorised Market Institutions RulesIn these Rules the underlying indicates a new text and the strikethrough indicates a removed text

1. INTRODUCTION (…)

1.1.2. Outsourcing

An Authorised Market Institution may satisfy the requirements applying to it under these Rules by making arrangements for functions to be performed on its behalf by any other Person. In such circumstances:

(a)   An Authorised Market Institution must, before entering into any material outsourcing arrangements with a service provider, obtain the AFSA’s prior approval to do so notify AFSA of such an arrangement.

(b)    For the avoidance of doubt, the requirement in sub-paragraph (a) applies to any outsourcing arrangements which were not in existence at the time the Authorised Market Institution was granted a Licence.

(c)   Outsourcing arrangements made by an Authorised MarketInstitution do not affect the responsibility of the Authorised Market Institution to satisfy the requirements applying to it, but there is in addition a requirement applying to the Authorised Market Institution that the Personwho performs (or is to perform) the functions is a fit and properPerson who is able to perform them.

(d)  An Authorised Market Institution that outsources any functions must comply with the outsourcing requirements in GEN.

2. RULES APPLICABLE TO ALL AUTHORISED MARKET INSTITUTIONS (…)

2.5. Business Rules

2.5.1.Requirement to prepare Business Rules

Save where the AFSA otherwise directs, an Authorised Market Institution must establish and maintain Business Rules governing relations between itself and the participants in the market, including but not limited to:

(a) Membership Rules,prepared in accordance with AMI 2.6, governing the admission of Members and any other Persons to whom access to its facilities is provided;

(b) Direct Electronic Access Rules, preparedin accordance with AMI 2.7, in case a Direct Electronic Access is available at the Authorised Market Institution, setting out the rules and conditions pursuant to which its Members may provide their clients with Direct Electronic Access to the Authorised Market Institution’s trading systems;

(…)

2.6.4. Undertaking to comply with AFSA rules

An Authorised Market Institution may not admit a Recognised Non-AIFC Member as a Member unless it:

(…)

(d)   where the Recognised Non-AIFC Member is incorporated outside the Republic of Kazakhstan, appoints and maintains at all times, an agent for service of process in the Republic of Kazakhstan AIFC.

Guidance

(1)Service of process is the procedure by which a party to a lawsuit (Claimant) gives an appropriate notice of initial legal action (Claim Form) to another party (Defendant), in an effort to exercise jurisdiction over that Person so as to enable that Person to respond to the proceeding before the court. Notice is furnished by delivering a set of court documents (called "process") to the Person to be served. Service of a Claim Form is defined in clause 4.9 of the AIFC Court Rules. Acknowledgement of process and consequences of not filing an acknowledgment of service are defined in clause 7.4 of the AIFC Court Rules. Methods of service are defined in Part 5 of the AIFC Court Rules.

(2)An agent for service of process is a serviceprovider having legal and real presence in the AIFC.

(3)The main role of agent for serviceof process is to receiveservice of processin the AIFC on behalf of a Person, acknowledge the service of process, and forward the process to such Person once it is received.

3. RULES APPLICABLE TO AUTHORISED INVESTMENT EXCHANGES

3.2.3. Undertaking to comply with AFSA rules

An Authorised Investment Exchange may not admit Securities or Units in a Listed Fund to trading unless the Person who seeks to have such Investments admitted to trading:

(…)

(d) appoints and maintains at all times, an agent for service of process in the AIFC and requires such agent to accept its appointment for service of process.

Guidance

See Guidance to AMI 2.6.4

(….)

3.6.5.Application for admission of Securities or Units in a Listed Fund to an Official List (…)

(4)Subject to (5), at least 5 business days prior to an admission of Securities (other than (i) Exempt Securities or (ii) EquitySecurities in connection with Pre-IPO Listings) or Units

in a Listed Fund to its Official List, an Authorised Investment Exchange must provide the AFSA with notice of the decision and include the following information in the notification:

(a) a copy of the listing application;

(b)    a copy of the assessment of the listing application carried out by the Exchange; and

(c)   any information requested by the AFSA.

(4-1) Subject to (5), at least 2 business days prior to an admission of Exempt Securities to its Official List or Equity Securities to its Official List under the sub-heading “Pre-IPO

 Listings”, an Authorised Investment Exchange must provide the AFSA with notice of the decision and include the information specified in (4) above.

(5)An Authorised Investment Exchange must immediately notify the AFSA of any decision to suspend,restore from suspension or de-list any Securities or Units in a Listed Fund from its Official List and the reasons for the decision.

3.6.6.Undertaking to comply with AFSA rules

An Authorised Investment Exchange may not admit Securities or Units in a Listed Fund to an Official List unless the issuer of such Investments:

(…)

(d) appoints and maintains at all times, an agent for service of process in the AIFC and requires such agent to accept its appointment for service of process.

Guidance

See Guidance to AMI 2.6.4

4. RULES APPLICABLE TO AUTHORISED CLEARING HOUSES (…)

4.4.Settlement

4.4.1.Settlement finality

(1)An Authorised Clearing House must have rules and procedures which clearly define:

(a)  the point at which settlement is final according to the relevant governing law; and

(b)  the point after which unsettled payments, transfer instructions, or other obligations may not be cancelled by a participant.

(2)An Authorised Clearing House must complete final settlement no later than the end of the valuedate.

(3)Notwithstanding (1) above,a settlement by an Authorised Clearing House is final,

irrevocable and binding and may not under any circumstances be reversed or avoided after:

(a)an amount of money is credited to or debited from a depository account; or

(b)  an Investment approved for admission to the depository is credited to or debited from a depository account.

(4)Notwithstanding (1) above, transfer instructions and settlement are legally enforceable and, even in the event of insolvency proceedings against a participant, shall be binding on third parties, provided that transfer instructions were entered into a system before the moment of opening of such insolvency proceedings. Where, exceptionally, transfer instructions are entered into a system after the moment of opening of insolvency proceedings and are carried out on the day of opening of such proceedings, they shall be legally enforceable and binding on third parties only if, after the time of settlement, the Authorised ClearingHouse can prove that it was not aware, nor should have been aware, of the opening of such proceedings.

(5)For the purpose of (4), the moment of opening of insolvency proceedings shall be the moment when the relevant judicial or administrative authority handed down its decision.

5. SUPERVISION (…)

5.3.Financial and otherinformation

5.3.1.Annual reports and accounts financial statements

Authorised Market Institution must give the AFSA:

(a) a copy of its audited annual report and accounts financial statements; and

(b)  a copy of any audited consolidated annual report and accounts financial statements of any group of which the Authorised Market Institution is a member;

no later than when the first of the following events occurs:

(c) three four months after the end of the financial year to which the document relates;

(d)  the time when the documents are sent to Persons granted access to the facilities or shareholders of the Authorised Market Institution; or

(e)  the time when the document is sent to a holding company of the Authorised Market Institution.

Consultation Paper on Special Rules Declaring Provisions of AIFC Regulations and Rules to be Subject to Section 9 of the AIFC Financial Services Framework Regulations

Introduction

1.This paper summarises the approach taken to drafting the Special Rule. The Annex sets out the proposed draft of Special Rule, which may be subject to change depending on the scope of the regulatory framework requested by the AIFC.

2.The proposals in this Consultation Paper will be of interest to current and potential AIFC Participants who are interested in doing business in the AIFC.

3.All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-L-CE-2020- 0001” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including on its website, any comments you provide, unlessyou expressly requestotherwise. Comments supported by reasoning and evidence will be given more weightby the AFSA.

4.The deadline for providing commentson the proposals is 24 July 2020. Once we receive your comments, we shall consider if any refinements are required to this proposal.

5.Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA) 55/17 Mangilik El, building C3.2, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +8 7172 613781

6.The remainder of this Consultation Paper contains the following:

(a)    Background

(b)    The Rules

(c)     Annex 1

Background

1.In2017-2019 the AFSA worked on the development of the body of the AIFC legislation. As of 2020, the key legislative acts based on the best international practices and international standards were developed and approved. Given that, at the beginning the AIFC participants from Kazakhstan and the whole region could experience some difficulties in meeting the highestregulatory requirements, the AFSA would like to enhance its approach for granting waivers, modifications and other types of reliefs.

2. Currently, AFSA can only waive and modify FSFR and provisions of the Rules made pursuant to FSFR, which significantly limits the powers of the AFSA on providing waivers or modifications direction. At this stage of development such approach does not allow AFSA to provide timely and efficient responses to business needs of AIFCparticipants.

3.This necessitates the changeof the approach by grantingAFSA’s Board of Directors power to enact other types of Regulations outside the scope of FSFR and AFSA’s CEO the broader power to waive,modify and provideother types of reliefs in order to avoid constant need to amend legislation.

4.To implement the abovementioned amendments to the section 9 of the FSFR (AFSA Power to modify or waive Rules) has been made, that provides AFSA with executivepower to waive and modify a provision of FSFR and other Regulations, the Rules..

5.Amended Section 9 of FSFR gives the AFSA power to waive and modify the application to a Person of certain “relevant provisions” in and under the FSFR. Also, gives the AFSA power to waive and modify not only Rules pursuant to FSFR, but Regulations as well in order to make the regulations much more flexible and for AFSA to be more pro-active, when it is needed for businesses, and the regulations much more flexible.

6.For these purposes, “relevant provision” means any provision (a) of FSFR, the Rules or any other legislation administered by the AFSA, and (b) of any other Regulations and Rules which (i) relate to the functions of the AFSA and (ii) are declared by Rules adopted by the Board of Directors of the AFSA to be a provision to which Section 9 of FSFR applies.

7.Considering that the language of Section 9 is enabling in that it permits provisions of the

(i)AIFC Trust Regulations, (ii) AIFC Personal Property Regulations, (iii) AIFC Payment System Settlement Finality Regulations, (iv) AIFC NettingRegulations to be made subject to the AFSA’s waivercapacity under Section9 through the issuance of Rules, includingfor present purposes such rules as may be issued by the Board of Directors of the AFSA.

8.It is proposed that the Special Rule be issued as a special stand-alone Rule. The Rule could be made to, by its own terms.

The Rules

1.In summary, the contents of the draft Special Rule are as follows:

2.    Part 1: (General): which include:

1.1. Name

1.2. Commencement

1.3. Legislative Authorit

1.4. Application of these Rules

1.5. Definitions, etc.

3.    Part 2: (AIFC REGULATIONS AND RULES SUBJECT TO SECTION 9 OF THE AIFC FINANCIAL SERVICES FRAMEWORK REGULATIONS): which include:

2.1. The provisions of AIFC Regulations and Rules and AIFC Regulations and Rules specified in Schedule 1 are hereby subject to Section 9 (AFSA power to modify, waive or grant a relief) of the AIFC Financial Services Framework Regulations.

2.2.Where a waiver, modification or no-action letteris granted pursuantto Section 9 of the AIFC Financial Services Framework Regulations, any other provisions referencing such relevant provision shall be read with the necessary changes being made in order to give effect to such waiver, modification or no-action letter.

2.2.1. Includes an example of applicability of the Special Rule.

4.    Schedule 1: Provides the list of Regulations which are subject to Section 9 (AFSA power to modify, waive or grant a relief) of FSFR. Which include:

1. AIFC Trust Regulations

2. AIFC Personal Property Regulations

3. AIFC Payment System Settlement Finality Regulations

4. AIFC Netting Regulations

Annex 1 to Consultation Paper: AIFC Special Rules Declaring Provisions of AIFC Regulations and Rules to be Subject to Section 9 of the AIFC Financial Services Framework Regulations (“Special Rule”)

AIFC SPECIAL RULES DECLARING PROVISIONS OF AIFC REGULATIONS AND RULES TO BE SUBJECT TO SECTION 9 OF THE AIFC FINANCIAL SERVICES FRAMEWORK REGULATIONS

PART 1: GENERAL

1.1 Name

These Rules are the Special Rules DeclaringProvisions of AIFC Regulations and Rules to be Subject to Section 9 of the AIFC Financial Services Framework Regulations.

1.2Commencement

These Rules commence on                 .

1.3 Legislative Authority

These Rules are adopted by the Board of Directors of the Astana Financial Services Authority under Section 5(23) of the Charter of the Board of Directors of the Astana Financial Services Authority.

1.4 Application of these Rules

These Rules apply within the jurisdiction of the AIFC.

1.5 Definitions, etc.

Terms used in this Rule have the same meanings as they have, from time to time, in the AIFC Regulations and AIFC Rules, or the relevant provisions of those Regulations and Rules, unless the contrary is stated.

PART 2: AIFC REGULATIONS AND RULES SUBJECT TO SECTION 9 OF THE AIFC FINANCIAL SERVICES FRAMEWORK REGULATIONS

2.1The provisions of AIFC Regulations and Rules and AIFC Regulations and Rules specified in Schedule 1 are hereby subject to Section 9 (AFSA power to modify, waive or grant a relief) of the AIFC Financial Services Framework Regulations.

2.2Where a waiver, modification or no-action letter is granted pursuant to Section 9 of the AIFC Financial Services Framework Regulations, any other provisions referencing such relevant provision shall be read with the necessary changes being made in order to give effect to such waiver, modification or no-action letter.

2.2.1.Example: if a modifications is granted from the requirement of Section 56(9) of the AIFC Trust Regulations that the Trustees may make payment on fines imposed by the AFSA within 60 days not 30 days, shall be read as permitting such Trustee to make fine payment within 60 days.

SCHEDULE 1

1.    AIFC Trust Regulations, AIFC Regulations No. 31 of 2019

2.    In relationto matters relatedto the regulation conducted by the AFSA, modifying or waiving the application of provisions of the AIFC Personal Property Regulations in relation to the holding of Investments or interests or entitlements in Investments, pursuantto Section (43) of the AIFC Personal Property Regulations, AIFC Regulations No.15 of 2017

3.    AIFC Payment System Settlement Finality Regulations, AIFC Regulations No.9 of 2017

4.    AIFC Netting Regulations, AIFC Regulations No.8 of 2017

Consultation Paper on Enhancing AIFC Islamic Banking Business Rules

Addressing Certain Limitations Related to Founding Members of Non-Profit Incorporated Organisations

Introduction

1. The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed amendments to the AIFC Non-profit Incorporated Organisations Regulations and AIFC Non-profit Incorporated Organisations Rules related to addressing certain limitations related to Founding Members of Non-Profit Incorporated Organisations.

2. The proposals in this Consultation Paper will be of interest to current and potential AIFC Participants who are interested in doing business in the AIFC.

3. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-O-CE-2019-0001” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including onits website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4. The deadline for providing comments on the proposals is 19 December 2019. Once we receive your comments, we shall consider if any refinements are required to the proposals.

5. Comments to be addressed by: post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El avenue, block C3.2, Nur-Sultan, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +7 7172 647375

6. The remainder of this Consultation Paper contains the following:

(a) background to the proposals;

(b) the key element of the proposed amendments;

(c) Annex 1: Draft of proposed amendments.


Background

The Astana Financial Services Authority ("AFSA") proposes to make amendments to the AIFC Non-Profit Incorporated Organisations Regulations and Rules to remove limitations in the current framework to permit legal entities to serve as Founding Members of the AIFC Non-profit Incorporated Organisations. The proposed amendments also aim to remove the requirement on the number of Founding Members that may apply for the incorporation of a Non-profit Incorporated Organisation.

KEY ELEMENT OF THE PROPOSED AMENDMENTS

Currently, Section 12(1) of the AIFC Non-profit Incorporated Organisations Regulations states that “Three or more individuals may apply for the incorporation of an Incorporated Organisation by signing, and filing with the Registrar of Companies, an application for incorporation in the accordance with the Rules”. The definition of Founding Member similarly uses the word “individuals”.

The proposed amendments remove limitations in the current framework to permit legal entities to serve as Founding Members of the AIFC Non-profit Incorporated Organisation, as well as remove the requirement on the number of Founding Members that may apply for the incorporation of a Non-profit Incorporated Organisation.

Additionally, the proposed amendments are related to simplification of the Standard Charter for Non-profit Incorporated Organisations.

Question

Do you have any concerns related to the proposed amendments to AIFC Non-profit Incorporated Organisations Regulations and AIFC Non-profit Incorporated Organisations Regulations Rules? If so, what are they, and how should they be addressed?

Annex 1: Draft of proposed amendments

In this Annex, a blue font and underlining indicates new text and strikethrough indicates deleted text.

AIFC NON-PROFIT INCORPORATED ORGANISATIONS REGULATIONS

PART 3: FORMATION AND REGISTRATION

12. Method of formation

(1) Three One or more individuals Founding Members may apply for the incorporation of an Incorporated Organisation by signing, and filing with the Registrar of Companies, an application for incorporation in the accordance with the Rules.

(2) The application must state the following:

(a) the proposed name of the Incorporated Organisation;

(b) the proposed address of the Incorporated Organisation’s registered office;

(c) the Authorised Activities proposed to be conducted by the Incorporated Organisation;

(d) the full name, nationality, residency and address of each of the applicants, if the applicant is a natural person;

(e) the other particulars (if any) required by the Registrar of Companies or the Rules;

(f) the full name, date and place of incorporation or registration of each of the applicants, if the applicant is a Body Corporate.

(3) The application must include, or be accompanied by, the following:

(a) a declaration signed by each of the applicants that the Incorporated Organisation will only conduct Authorised Activities;

(b) the proposed Charter of Organisation of the Incorporated Organisation.

PART 4: FINANCIAL RESOURCES, ACCOUNTS AND AUDIT

22. Accounts

(1) The Founding Members of an Incorporated Organisation must ensure that accounts are prepared in relation to each financial year of the Incorporated Organisation within 6 months after the end of the financial year and that the accounts comply with the requirements of this section.

(2) The accounts must:

(a) be prepared in accordance with accounting principles or standards prescribed by the Rules or otherwise approved by the Registrar of Companies; and

(b) show a true and fair view of the financial position of the Incorporated Organisation; and

(c) comply with any other requirements of these Regulations and the Rules.

(3) The Founding Members must approve the Incorporated Organisation’s accounts and must ensure that they are signed on their behalf by at least 2 1 of them.

(4) The accounts must be examined and reported on by an Auditor.

(5) An Incorporated Organisation must file its audited accounts for a financial year with the Registrar of Companies within 7 days after the day the accounts are approved by the Founding Members and reported on by an Auditor.

(6) Contravention of this section is punishable by a fine.

PART 5: FOUNDING MEMBERS AND ORDINARY MEMBERS

23. Founding Members and Ordinary Members

(1) An Incorporated Organisation must have Founding Members and may have Ordinary Members.

(2) The Charter of Organisation of an Incorporated Organisation must define who may become a Founding Member or an Ordinary Member of the Incorporated Organisation.

(3) The initial Founding Members are the Persons who applied for the incorporation of the Incorporated Organisation.

(4) After the incorporation of the Incorporated Organisation, Founding Members are appointed by Special Resolution of the Founding Members

(5) The Founding Members of an Incorporated Organisation must, in Exercising their Functions, act honestly, in good faith and in the best interest of the Incorporated Organisation and must exercise the care, diligence and skill that a reasonably prudent pPerson would exercise in comparable circumstances.

(6) A pPerson may not be a Founding Member and an Ordinary Member at the same time in the same Incorporated Organisation.

26. Meetings of Founding Members

(1) The Founding Members are to meet at the times and places that they decide.

(2) However, a Founding Member may at any time call a meeting of the Founding Members by giving the other Founding Members at least 21 7 days Written notice of the meeting.

27. Board of Incorporated Organisation

(1) An Incorporated Organisation must be managed by a Board.

(2) An Incorporated Organisation must ensure that its Board consists solely of Founding Members and that Ordinary Members are not involved in the management of the Incorporated Organisation. [intentionally omitted]

(3) An Incorporated Organisation must ensure that its Charter of Organisation makes provision about the membership of its Board and the Board’s Functions and operations.

(4) The Board may appoint a resident of the Republic of Kazakhstan to be the Incorporated Organisation’s agent.

(5) Subject to the Charter of Organisation, the Board may delegate any of its Functions to any Person it considers appropriate.

(6) Contravention of this section is punishable by a fine.

PART 6: REPORTING

28. Notice of certain changes

(1) If any of the following changes happen in relation to an Incorporated Organisation, the Incorporated Organisation must file notice of the change with the Registrar of Companies, in accordance with the Rules, within 30 days after the day the change happens:

(a) any change relating to its registered office or contact details (including, for example, a change in the address of its registered office, a change in a telephone or fax number or a change of email address);

(b) any change to its Founding Members;

(c) any change to its name;

(d) any change in its Authorised Activities.

(2) Changes in the Registered Details notice must be accompanied by the prescribed fee set out in the Rules from time to time.

SCHEDULE 1: INTERPRETATION

Annex 1 (Comparative table of proposed amendments to the AML Rules) (AIFC Rules No.FR0008 of 2017)

*Annex 1_AIFC BBR Rules

Chapter 1 General

1.1 Introduction

The purpose of this Banking Business Rules (BBR) is to establish the prudential framework for Authorised Firms carrying out Banking Business. These rules are based on the Basel Accords and on the Basel Core Principles for Effective Banking Supervision, issued by the Basel Committee on Banking Supervision.

1.2 Commencement

These rules commence on 1 2018.

1.3 Effect of definitions, notes and examples

(1) A definition in the glossary to these rules also applies to any instructions or document made under these rules.

(2) A note in or to these rules is explanatory and is not part of these rules. However, examples and guidance are part of these rules.

(3) An example is not exhaustive, and may extend, but does not limit, the meaning of these rules or the particular provision of these rules to which it relates.

(4) Unless the contrary intention appears, a reference in these rules to an accord, principle, standard or other similar instrument is a reference to that instrument as amended from time to time.

1.4 Banking Business firms

(1) Banking Business comprises the Regulated Activities of Accepting deposits and Dealing in Investments as Principal. An Authorised Firm that has an authorization to conduct any of those activities is a Banking Business firm.

(2) However, an Authorised Firm that is an Islamic bank or an Islamic Broker dealer or an Islamic Financing Company (within the respective meanings of the AIFC Islamic Banking Business Prudential Rules No. FR0014 of 2017) is not a Banking Business firm for the purposes of these Rules.

(3) A Banking Business firm may be a Bank or a Broker Dealer.

Guidance

A firm that conducts any of the activities that make up Banking Business, or a combination of those activities, will need to consider the extent to which its business model is subject to the prudential requirements set out in these rules. These rules are designed to address the different prudential risks that could arise from the broad range of business models, risk appetites and risk profiles of banking business firms.

For example, a firm that solely conducts the activity of Dealing in Investments as Principal (that is, a Broker Dealer) will need to consider the extent to which its activities in buying, selling, subscribing to or underwriting

investments attract prudential risks that are subject to the requirements of these rules. In contrast, a firm that is a Bank and that also deals in Investments as Principal would be subject to a broader range of prudential requirements. In both examples, these rules apply in accordance with the nature, scale and complexity of the firm’s business.

1.5 Bank

(1) An Authorised Firm is a Bank if it is authorised to conduct the Regulated Activity of Accepting Deposits.

(2) An Authorised Firm is a Bank even if it is also authorised to conduct any other Regulated Activity or activity. The authorisation for Accepting Deposits qualifies an Authorised Firm as a Bank.

1.6 Broker Dealer

(1) An Authorised Firm is a Broker dealer if it is authorised to conduct the regulated activity of dealing in investments as Principal and it is not a Bank.

(2) A Broker Dealer may raise funds from capital markets or money markets using debt instruments of any type but must not accept deposits.

(3) A firm is a Broker Dealer even if it is also authorised to conduct any other regulated activity (except accepting deposits). The authorisation for dealing in investments as a Principal and the absence of an authorisation for accepting Deposits qualifies an Authorised Firm as a Broker Dealer.

(4) An Authorised Firm licensed to conduct the Regulated Activity of Dealing in Investments as Principal on a matched principal basis does not fall under the category of Broker Dealer. Such firms are subject to the rules in PRU (INVT) and are not subject to the BBR rules.

1.7 Legal form that firms must take

(1) A Bank must be:

(a) a limited liability company incorporated under the AIFC Companies Regulations or

(b) a branch of a Foreign Company, registered as a Recognised Company in the AIFC with the Registrar in accordance with the AIFC Companies Rules.

(2) A Broker Dealer must be:

(a) a limited liability company incorporated under the AIFC Companies Regulations;

(b) a branch of a Foreign Company, registered as a Recognised Company in the AIFC with the Registrar in accordance with the AIFC Companies Rules; or

(c) a Limited Partnership incorporated under the AIFC Limited Partnership

Regulations.

1.8 Application of these rules—general

(1) Except as stated otherwise, these rules apply to a Person that has, or is applying for, an authorisation to conduct Banking Business, as defined in Rule 1.4(a).

(2) Except as stated otherwise, all references to a Bank in the rest of this BBR Rules must be read as referring also to Broker Dealers, defined in Rule 1.6. Consequently, all the regulatory requirements imposed by these BBR Rules apply to all entities licensed to carry out Banking Business as defined in Rule 1.4 (a), except for specific sections or rules wherein their applicability is defined in a particular manner. For sake of clarity, all the regulatory requirements imposed by the BBR Rules apply to Banks and Broker Dealers as defined in Rules 1.5 and 1.6, unless specified otherwise in specific sections or rules of the BBR.

Guidance

It is possible for an Authorised Firm to be authorised both as a Bank under these rules and to hold authorisations for carrying out other Regulated Activities defined in Schedule 1 of the AIFC GEN Rules. Both these rules and the relevant rules for those activities could apply to such an Authorised Firm in relation to the activities they are involved in. In relation to such an Authorised Firm, however, the Capital requirements in these rules apply. If that Authorised Firm complies with the Capital requirements in these rules, it is taken to comply with the prudential rule requirements specified in PRU Rules of the AFSA rulebook.

1.9 Application of these rules—branches

(1) Chapter 4 (Capital adequacy) does not apply to a Bank operating in the form of a branch in the AIFC, in so far as that Chapter would require the branch to hold Capital.

(2) However, the AFSA may require a branch to have Capital resources or to comply with any other Capital requirement if the AFSA considers it necessary or desirable to do so in the interest of effective supervision of the branch.

1.10 Requirement for policy also requires procedures and systems

In these rules, a requirement for a Bank to have a policy also requires such a firm to have the procedures, systems, processes, controls and limits needed to give effect to the policy.

1.11 Responsibility for principles

(1) A Bank’s Governing Body is responsible for the firm’s compliance with the

principles and requirements set out in these rules.

(2) The governing body must ensure that the firm’s senior management establishes and implements policies to give effect to these rules. The governing body must approve significant policies and any changes to them (other than formal changes) and must ensure that the policies are fully integrated with each other.

Note: The significant policies relate to the adequacy of capital and the management of various prudential risks faced by a Bank and group risk, as set out in the following Chapters.

(3) The governing body must review the firm’s significant policies from time to time, taking into account changed operating circumstances, market conditions, activities and risk profiles. The interval between reviews must be appropriate for the nature, scale and complexity of the Bank’s business, but must not be longer than 12 months.

(4) The governing body must ensure that the policies are made known to, and understood by, all relevant staff.

Chapter 2 Principles relating to Banking Business

2.1 Principle 1—Capital Adequacy

A Bank must have capital, of adequate amount and appropriate quality, for the nature, scale and complexity of its business and for its risk profile. A Bank must have appropriate risk management strategies that have been approved by the Bank's Governing Body. The Governing Body of the Bank must set its risk appetite to define the level of risk the Bank is willing to assume.

2.2 Principle 2—Credit Risk and Problem Assets

(1) A Bank must have an adequate credit risk management policy that takes into account the Bank’s risk tolerance, its risk profile and the market and macroeconomic conditions.

(2) A Bank must have comprehensive policies to identify, measure, evaluate, monitor, report and control or mitigate credit risk in a timely way.

(3) A Bank must have adequate policies for the early identification and management of problem assets, and the maintenance of adequate provisions and reserves.

2.3 Principle 3—Transactions with Related Parties

A Bank must enter into transactions with related parties on an arm’s-length basis in order to avoid conflicts of interest.

2.4 Principle 4—Concentration Risk

A Bank must have adequate policies to identify, measure, evaluate, manage and control or mitigate concentrations of risk in a timely way.

2.5 Principle 5—Market Risk

A Bank must have an adequate market risk management policy that takes into account the firm’s risk tolerance, its risk profile, the market and macroeconomic conditions and the risk of a significant deterioration in market liquidity. The firm must have adequate policies to identify, measure, evaluate, manage and control or mitigate market risk in a timely way.

2.6 Principle 6—Operational Risk

A Bank must have an adequate operational risk management policy that takes into account the firm’s risk tolerance, its risk profile and market and macroeconomic conditions. The firm must have adequate policies to identify, measure, evaluate, manage and control or mitigate operational risk in a timely way.

2.7 Principle 7— Interest Rate Risk in the Banking Book

A Bank must have an adequate management policy for interest rate risk in the banking book that takes into account the firm’s risk tolerance, its risk profile and the market and macroeconomic conditions. The firm must have policies to identify, measure, evaluate, manage and control or mitigate interest rate risk in the banking book on a timely basis.

2.8 Principle 8—Liquidity Risk

A Bank must have prudent and appropriate quantitative and qualitative liquidity requirements. The firm must have policies that enable the firm to comply with those requirements and to manage liquidity risk prudently.

2.9 Principle 9—Group Risk

A Bank must effectively manage risks arising from its membership in a group.

Chapter 3 Prudential Reporting Requirements

3.1 Introduction

(1) This Chapter sets out the prudential reporting requirements for a Bank.

(2) Prudential returns of a Bank must reflect its management accounts, financial statements and ancillary reports. A Bank’s returns, accounts, statements and reports must all be prepared using the same standards and practices, and must be easily reconcilable with one another.

(3) A return is referred to as a solo return if it reflects the individual Bank’s accounts,

statements and reports.

(4) A consolidated return means a return which reflects the accounts, statements and reports of a Bank consolidated with those of the other members of its Financial Group.

Note Financial Group is defined in Chapter 10 of BBR and is used for consolidated reporting instead of

‘corporate group’.

3.2 Information about Financial Group

(1) If directed by the AFSA, a Bank must give the AFSA the following information about its Financial Group:

(a) details about the entities in the group;

(b) the structure of the group;

(c) how the group is managed;

(d) any other information that the AFSA requires.

3.3 Financial Group risk

(1) If a Bank is part of a financial group, credit risk, market risk, operational risk, IRRBB and liquidity risk exposures (collectively referred to as prudential risk exposures) apply on a consolidated basis to the Bank and the other members that constitute its Financial Group.

(2) Preparing returns on a consolidated basis means including the financial effects and risk exposures arising from all the activities of all the members or entities forming part of the Bank’s Financial Group. Such returns are not restricted to just reflecting the financial activities or positions of the Bank.

Note: A Bank is required to have systems to enable it to calculate its financial group capital requirement and resources, according to rules in Chapter 10 of the BBR.

3.4 Preparing returns

(1) A Bank must prepare the prudential returns that it is required to prepare by a notice published by the AFSA on its own website. Such a notice may also require Banks to give other information to the AFSA.

(2) The Bank must give the return to the AFSA within the period stated in the notice.

(3) The AFSA may, by written notice:

(a) require a Bank to prepare additional prudential returns;

(b) exempt a Bank from a requirement to prepare annual, biannual, quarterly or monthly returns (or a particular return); or

(c) extend the period within which to give a return.

(4) An exemption may be subject to one or more conditions. The Bank availing the exemption must comply with any condition attached to an exemption.

(5) The Bank must prepare and submit its prudential returns in accordance with the AFSA’s instructions. Such instructions may require that the return be prepared or given through an electronic submission system.

(6) The instructions may be set out in these rules, in the return itself, in a separate document published by the AFSA on its own approved website or by written notice. These instructions, wherever or however they are given, are collectively referred to as instructions for preparing returns.

Note: Instructions may be in the form of formulae or blank spaces that the Bank are expected to use or fill in which would automatically compute the amounts to be reported.

3.5 Giving information

(1) The AFSA may, by written notice, require a Bank to provide information in addition to that required under these rules.

(2) A Bank must submit the required information to the AFSA in accordance with the AFSA’s instructions and within the period stated in the written notice seeking such information. The AFSA may extend the period for the submission of such information.

(3) The AFSA may exempt a Bank from giving information. The Bank must comply with any conditions attached to such an exemption.

3.6 Accounting standards

A Bank must prepare and maintain its financial accounts and prepare its financial statements in accordance with the International Financial Reporting Standards (IFRS).

3.7 Signing returns

(1) A prudential return must be signed by 2 individuals, who are Approved Individuals for the Bank and who occupy any of the Controlled Functions of Director, Senior Executive Officer or Finance Officer.

(2) If these Approved Individuals are not available or are unable to sign, the return must be signed by 1 or 2 of the individuals approved to exercise the following Controlled Functions:

(a) the Risk Manager function;

(b) the Compliance Officer function.

3.8 Obligation to notify the AFSA

(1) A Bank must notify the AFSA if it becomes aware, or has reasonable grounds to believe, that the Bank has breached, or is about to breach, a prudential requirement.

(2) In particular, the Bank must notify the AFSA as soon as practicable of:

(a) any breach or potential breach of its minimum capital requirement;

(b) any concern it has about its solvency or capital adequacy position;

(c) any indication of significant adverse change in the market price of, or trading volume of, the equity capital or other capital instruments of the Bank or those of its Financial Group (including pressure on the Bank to purchase its own equity or debt);

(d) any other significant adverse change in its capital; and

(e) any significant departure from its ICAAP.

(3) The Bank must also notify the AFSA of any measures planned or taken to deal with any real or potential breach or concerns related to its solvency or capital adequacy position.

Chapter 4 Capital Adequacy

4.1 Introduction

(1) This Chapter sets out capital adequacy requirements for a Bank.

(2) A Bank’s total Regulatory Capital is the sum of its tier 1 capital and tier 2 capital. The categories and elements of regulatory capital, as well as the limits, restrictions and adjustments to which they are subject are set out in this Chapter.

(3) Capital adequacy and capital management must be an integral part of a Bank’s overall governance and its bank-wide risk management process. Capital management must align the Bank’s risk appetite and risk profile with its capacity to absorb losses.

4.2 Application to branches

(1) This chapter does not apply to a Bank that is licensed to operate as a branch in the AIFC, insofar as this chapter would require the branch to hold capital.

(2) A branch is required to comply with the reporting requirements under this chapter. In relation to the branch’s ICAAP, the branch may rely on the ICAAP for the bank of which it is a part (if available), to demonstrate compliance.

4.3 Governing Body’s responsibilities

(1) A Bank’s governing body must consider, on a periodic basis, whether the minimum capital and liquidity resources required by these rules are adequate to ensure that there is no significant risk that the Bank’s liabilities cannot be met as they fall due. The Bank must take material and effective measures to obtain additional capital and liquidity resources if its governing body considers that the minimum requirements defined in these rules do not adequately reflect the risks of its business.

(2) The governing body is also responsible for:

(a) ensuring that capital management is part of the Bank’s enterprise-wide risk management framework and is aligned with its risk appetite and risk profile;

(b) ensuring that the Bank has, at all times, capital and liquidity resources of the kinds and amounts required by these rules;

(c) ensuring that the Bank has capital, of adequate amount and appropriate quality, for the nature, scale and complexity of its business and for its risk profile;

(d) ensuring that the amount of capital it has exceeds its minimum capital requirement, calculated according to these rules;

(e) reviewing the Bank’s annual ICAAP and approving it, including but not limited to

taking decisions to raise additional capital for the Bank; and

(f) monitoring the adequacy and appropriateness of the Bank’s systems and controls to ensure the Bank’s compliance with these rules.

4.4 Systems and controls

(1) A Bank must have adequate systems and controls to allow it to calculate and monitor its minimum capital requirement.

(2) The systems and controls must be documented and must be appropriate for its risk profile and proportionate to the nature, scale and complexity of its business.

(3) The systems and controls employed by a Bank must include the ICAAP process which is defined in greater detail in a separate chapter of these BBR Rules.

(4) The systems and controls must enable the Bank to demonstrate, its compliance with the rules in this Chapter, at all times.

(5) The systems and controls of the Bank must enable it to manage available capital in anticipation of events or changes in market conditions.

(6) A Bank must have adequate and proportionate contingency plans to maintain or increase its capital in times of stress, whether idiosyncratic or systemic.

4.5 Use of internal models

A Bank must not use its internal models to calculate regulatory capital requirements and assess capital adequacy in accordance with the BBR rules or to achieve compliance with the BBR Rules.

4.6 References to particular currencies

In these BBR rules, the specification of an amount of money in a particular currency is also taken to specify the equivalent sum in any other currency at the relevant time.

Initial and ongoing capital requirements

Section 4A – Capital Requirements and Ratios

4.7 Capital Requirements

(1) A Bank is required to meet minimum risk-based capital requirements for exposure to credit risk, market risk and operational risk, under these rules. The Bank’s capital adequacy ratios (consisting of CET 1 ratio, total tier 1 ratio and total capital ratio) are calculated by dividing its Regulatory Capital by total Risk-Weighted Assets (RWAs).

(2) Total RWAs of a Bank is the sum of:

(a) the Bank’s risk-weighted on-balance-sheet and off-balance-sheet exposures calculated in accordance with the Rules in Chapter 5 of BBR; and

(b) 12.5 times the sum of the Bank’s market and operational risk capital requirements (to the extent that each of those requirements applies to the Bank) calculated in accordance with the Rules in Chapters 6 and 7 of BBR respectively

(3) In this chapter, consolidated subsidiary, of a Bank, means:

(a) a subsidiary of the Bank; or

(b) a subsidiary of a subsidiary of the Bank.

4.8 Required tier 1 capital on authorisation

A Bank must have, at the time of its authorisation and at all times thereafter, Common Equity Tier 1 Capital (CET1 Capital) as defined in Rule 4.14, at least equal to the Base Capital Requirement applicable to it. The AFSA will not grant an authorisation for conducting Banking Business unless it is satisfied that the entity complies with this requirement.

4.9 Required ongoing capital

(1) A Bank must have at all times, Capital at least equal to the higher of:

(a) its Base capital requirement; and

(b) its Risk-based capital requirement.

Note A Bank whose minimum capital requirement is determined by its risk-based capital requirement is subject to the additional requirement to maintain a capital conservation buffer, as defined in Rule 4.31.

(2) The amount of Capital that a Bank must have, in accordance with these rules, is its Minimum Capital Requirement.

4.10 Base Capital Requirement

The Base Capital Requirement is:

(a) for a Bank — USD 10 million; or

(b) for a Broker dealer — USD 2 million.

4.11 Risk-based capital requirement

(1) The Risk-based Capital Requirement for a Bank is the sum of:

(a) its credit risk capital requirement;

(b) its market risk capital requirement; and

(c) its operational risk capital requirement.

(2) The market risk and operational risk capital requirements are required to be calculated according to the rules in chapters 6 and 7 respectively.

(3) The credit risk capital requirement must be calculated as

= 12.5 times the Bank’s risk-weighted on-balance-sheet and off-balance-sheet exposures calculated in accordance with the Rules in Chapter 5 of BBR.

4.12 Capital adequacy ratios

(1) A Bank’s capital adequacy is measured in terms of 3 capital ratios expressed as

percentages of its total Risk-Weighted Assets (RWAs).

(2) A Bank’s minimum capital adequacy ratios are:

(a) a CET 1 Capital ratio of 4.5%;

(b) a Tier 1 Capital (T1 Capital) ratio of 6%; and

(c) a Total Capital ratio of 8%.

(3) The AFSA may, if it believes it is prudent to do so, increase any or all of a Bank’s minimum capital adequacy ratios. The AFSA will notify the Bank in writing about a higher capital adequacy ratio and the timeframe available for the Bank to meet it.

(4) A Bank must maintain at all times capital adequacy ratios higher than the required minimum levels, so that adequate capital is maintained in the context of the Bank’s risk appetite and, risk profile, to absorb unexpected losses arising from its business activities.


Section 4B – Elements of regulatory capital

4.13 Regulatory Capital

(1) The Regulatory Capital of a Bank is the sum of its Tier 1 (T1) Capital and Tier 2 (T2) capital.

(2) T1 capital is the sum of a Bank’s CET 1 capital and Additional Tier 1 (AT1) capital. T1 capital is also known as going-concern capital because it is meant to absorb losses while the Bank is viable.

(3) T2 Capital is defined in BBR rule 4.18. T2 capital is also known as gone-concern capital because it is meant to absorb losses after the Bank ceases to be viable.

(4) For these rules, the 3 categories of regulatory capital are CET 1 Capital, AT1 Capital and T2 Capital.

4.14 Common Equity Tier 1 (CET1) Capital

CET 1 Capital is the sum of the following elements:

(a) common shares issued by the Bank that satisfy the criteria in rule 4.15 for classification as common shares for regulatory purpose (or the equivalent for non-joint stock companies);

(b) share premium resulting from the issue of instruments included in CET 1 Capital;

(c) retained earnings;

(d) accumulated other comprehensive income and other disclosed reserves;

(e) common shares, issued by a consolidated subsidiary of the Bank and held by third parties, that satisfy the criteria in rule 4.22 for inclusion in CET 1 capital;

(f) regulatory adjustments applied in the calculation of CET 1 capital in accordance with BBR rule 4.28.

4.15 Criteria for classification as common shares

A capital instrument issued by a Bank is eligible for classification as common equity and for inclusion in CET 1 capital, only if all of the following criteria in sub-rules (1) to (14) below are satisfied.

(1) The instrument is the most subordinated claim in case of the liquidation of the Bank.

(2) The holder of the instrument is entitled to a claim on the residual assets that is proportional to its share of issued capital, after all senior claims have been repaid in liquidation. The claim must be unlimited and variable and must be neither fixed nor capped.

(3) The principal amount of the instrument is perpetual and never repayable except in liquidation. Discretionary repurchases and other discretionary means of reducing capital allowed by law do not constitute repayment.

(4) The Bank does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled. The statutory or contractual terms do not provide anything that might give rise to such an expectation.

(5) Distributions are paid out of distributable items of the Bank (including retained earnings) and the amount of distributions:

(a) is not tied or linked to the amount paid in at issuance; and

(b) is not subject to a contractual cap (except to the extent that a Bank may not pay distributions that exceed the amount of its distributable items).

(6) There are no circumstances under which the distributions are obligatory. Non-payment of distributions does not constitute default.

(7) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. There are no preferential distributions and in particular none for any other elements classified as the highest quality issued capital.

(8) It is the issued capital that takes the first and proportionately greatest share of any losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going-concern basis proportionately and equally with all the others.

Note This criterion in (8) above would be considered as fulfilled if the instrument includes a permanent write- down mechanism.

(9) The paid-in amount is recognised as equity capital (rather than as a liability) for determining balance-sheet insolvency.

(10) The paid-in amount is classified as equity in accordance with the relevant accounting standards.

(11) The instrument is directly issued and paid-in, and the Bank has not directly or indirectly funded the purchase of the instrument.

(12) The paid-in amount is neither secured nor covered by a guarantee of the Bank or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder’s claim in relation to the claims of the Bank’s creditors.

(13) The instrument is issued only with the approval of the owners of the Bank, either given directly by the owners or, if permitted by the applicable law, given by its governing body or by other persons authorised by the owners.

(14) The instrument is clearly and separately disclosed on the Bank’s balance sheet.

4.16 AT1 Capital

AT 1 Capital is the sum of the following elements:

(a) instruments issued by a Bank that satisfy the criteria in BBR rule 4.17 for inclusion in AT1 Capital (and are not included in CET 1 Capital);

(b) share premium resulting from the issue of instruments included in AT1 Capital, according to (a) above, if any;

(c) instruments, issued by consolidated subsidiaries of the Bank and held by third parties, that satisfy the criteria in BBR rule 4.23 for inclusion in AT1 Capital (and are not included in CET 1 capital of the respective Banks);

(d) regulatory adjustments applied in the calculation of AT1 Capital in accordance with BBR rule 4.28.

4.17 Criteria for inclusion in AT1 Capital

A capital instrument is eligible for inclusion in AT1 Capital only if that instrument meets all of the following criteria in sub-rules (1) to (15).

(1) The instrument is issued and paid-up.

(2) The instrument is the most subordinated claim after those of depositors, general creditors and holders of the subordinated debt of the Bank.

(3) The paid-up amount for the capital instrument is neither secured nor covered by a guarantee of the Bank or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder’s claim in relation to the claims of the Bank’s creditors.

(4) The instrument is perpetual. It has no maturity date and there are no step-ups or other incentives to redeem.

(5) If the instrument is callable by the Bank, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the AFSA. The Bank must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the Bank:

(a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income capacity of the Bank; or

(b) must demonstrate to the AFSA that its capital will exceed the Bank’s minimum

capital requirement after the call option is exercised.

(6) A repayment of principal through repurchase, redemption or other means must be approved by the AFSA. The Bank must not assume, or create a market expectation, that such approval will be given.

(7) In respect of the dividend or coupon payable on the instrument

(a) The Bank has full discretion at all times to cancel distributions or payments;

(b) Any cancellation of a dividend or coupon is not an event of default;

(c) The Bank has full access to cancelled payments to meet obligations as they fall due; and

(d) Any cancellation of dividend or coupon does not impose restrictions on the Bank, except in relation to distributions to common shareholders.

(8) Dividends and coupons must be paid out of distributable items.

(9) The instrument must not have a credit-sensitive-dividend feature under which a dividend or coupon is periodically reset based (wholly or partly) on the Bank’s credit standing.

(10) The instrument must not contribute to the Bank’s liabilities exceeding its assets if such a balance-sheet test forms part of any insolvency law applying in the jurisdiction where the instrument was issued.

(11) An instrument classified as a liability for accounting purposes must have principal loss absorption through conversion to common shares, or a write-down mechanism that allocates losses to the instrument, at a pre- specified trigger point. The conversion must be made in accordance with rule 4.20.

(12) A write-down of the instrument has the following effects:

(a) reducing the claim of the instrument in liquidation;

(b) reducing the amount repaid when a call option is exercised;

(c) reducing or eliminating dividend or coupon payments on the instrument.

(13) Neither the Bank nor a related party over which the Bank exercises control or significant influence has purchased the instrument, nor has the Bank directly or indirectly funded the purchase of the instrument.

(14) The instrument has no features that hinder recapitalisation. For example, it must not require the Bank to compensate investors if a new instrument is issued at a lower price during a specified period.

(15) If the instrument is issued by a special purpose vehicle, the proceeds are immediately available without limitation to the Bank through an instrument that satisfies the other criteria for AT1 capital.

4.18 Tier 2 capital (T2 capital)

T2 capital is the sum of the following elements:

(a) instruments issued by the Bank that satisfy the criteria in rule 4.19 for inclusion in T2 capital (and are not included in T1 capital);

(b) share premium resulting from the issue of instruments included in T2 capital according to (a), if any;

(c) instruments, issued by consolidated subsidiaries of the Bank and held by third parties, that satisfy the criteria in rule 4.24 for inclusion in T2 capital (and are not included in T1 capital);

(d) regulatory adjustments applied in the calculation of T2 capital in accordance with BBR rule 4.28;

(e) general provisions or general reserves held against future, presently unidentified losses (but only up to a maximum of 1.25% of risk-weighted assets for credit risk, calculated using the standardised approach Chapter 5 of BBR).

Note General provisions and reserves are freely available to meet losses that subsequently materialise and therefore qualify for inclusion in T2 capital. In contrast, provisions for identified deterioration of particular assets or known liabilities, whether individual or grouped, should be excluded because they would not be available to meet losses.

4.19 Criteria for inclusion in T2 capital

A capital instrument is eligible for inclusion in T2 capital only if all the criteria in sub-rules (1) to (11) below are satisfied.

(1) The instrument is issued and paid-in.

(2) The instrument is the most subordinated claim after those of depositors and general creditors.

(3) The paid-in amount is neither secured nor covered by a guarantee of the Bank or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder’s claim in relation to the claims of the Bank’s depositors and general creditors.

(4) The original maturity of the instrument is at least 5 years.

(5) The recognition in regulatory capital in the remaining 5 years before maturity is amortised on a straight line basis and there are no step-ups or other incentives to redeem.

(6) If the instrument is callable by the Bank, it can only be called 5 years or more after the instrument is paid-in and only with the approval of the AFSA. The Bank must not do anything to create an expectation that the exercise of the option will be approved, and, if the exercise is approved, the Bank:

(a) must replace the called instrument with capital of the same or better quality and at conditions sustainable for the income capacity of the Bank; or

(b) must demonstrate to the AFSA that its capital will exceed the Bank’s minimum

capital requirement after the call option is exercised.

(7) The holder has no right to accelerate future scheduled payments of coupon or principal, except in bankruptcy or liquidation.

(8) The instrument does not have a credit-sensitive-dividend feature under which a dividend or coupon is periodically reset based (wholly or partly) on the Bank’s credit standing.

(9) Neither the Bank nor a related party over which the Bank exercises control or significant influence has purchased the instrument, nor has the Bank directly or indirectly funded the purchase of the instrument.

(10) If the instrument is issued by a special purpose vehicle, the proceeds are immediately available without limitation to the Bank through an instrument that satisfies the other criteria for tier 2 capital.

4.20 Requirements—loss absorption at point of non-viability

(1) This rule applies to an AT1 or T2 capital instrument issued by a Bank. It sets out additional requirements to ensure loss absorption at the point of non-viability.

(2) The terms and conditions of an instrument must give the AFSA the discretion to direct that the instrument be written-off or converted to common equity on the happening of a trigger event.

(3) The Bank must be able to issue the required number of shares specified in the instrument if a trigger event happens. The issuance of any new shares because of a trigger event must happen before any public sector injection of capital so that capital provided by the public sector is not diluted.

(4) Trigger event, in relation to the Bank that issued the instrument, is the earliest of:

(a) a decision of the AFSA that a write-off (without which the Bank would become non-viable) is necessary; and

(b) a decision by the relevant authority to make a public sector injection of capital, or give equivalent support (without which injection or support the Bank would become non-viable, as determined by that authority).

(5) If the Bank is a member of a financial group and the Bank wishes the instrument to be included in the group’s capital in addition to its solo capital, the trigger event must be the earliest of:

(a) the decision in sub-rule (4) (a);

(b) the decision in sub-rule (4) (b);

(c) a decision, by the relevant authority in the Bank’s home jurisdiction, that a write- off (without which the Bank would become non-viable) is necessary; and

(d) a decision, by the relevant authority in the jurisdiction of the financial regulator that regulates the parent entity of the Bank, to make a public sector injection of capital, or give equivalent support, in that jurisdiction (without which injection or support the Bank would become non-viable, as determined by that authority).

(6) Any compensation paid to the holder of an instrument because of a write-off must be paid immediately in the form of common shares (or the equivalent for non-joint-stock companies).

(7) If the Bank is a member of a financial group, any common shares paid as compensation to the holder of the instrument must be common shares of the Bank or of the parent entity of the group.


Section 4B – Treatment of Minority interests

4.21 Introduction

This section sets out the criteria and formulae for the treatment of minority interests in a Bank’s regulatory capital.

4.22 Criteria for third party interests— CET 1 capital

(1) For rule 4.14 (e), CET1 capital issued by a consolidated subsidiary of a Bank and held by a third party as a non-controlling interest, may be included in the Bank’s CET 1 capital if:

(a) the share would be included in the Bank’s CET 1 capital had it been issued by the

Bank; and

(b) the subsidiary that issued the share is itself a Bank or a Broker Dealer (or an equivalent entity in its home jurisdiction).

(2) The amount to be included in the consolidated CET 1 capital of a Bank is calculated in accordance with the following formula:

NCI – ((CET1s – Min) × SS)

where:

NCI is the total of the non-controlling interests of minority shareholders in a consolidated

subsidiary of the Bank.

CET1s is the amount of CET 1 capital of the subsidiary.

Min is the lower of:

(a) 7% of the total RWAs, as defined in BBR Rule 4.7 (2), of the subsidiary; and

(b) 7% of the share of consolidated RWAs of the group attributable to the subsidiary.

SS means the percentage of the shares in the subsidiary (being shares included in CET 1 capital) held by those third parties.

4.23 Criteria for third party interests—AT1 Capital

(1) For rule 4.16 (c), an instrument (including a common share) issued by a consolidated subsidiary of a Bank and held by a third party as a non-controlling interest may be included in the Bank’s AT1 Capital if the instrument would be included in the Bank’s AT1 Capital had it been issued by the Bank.

(2) Subject to (3), the amount to be included in the consolidated AT1 Capital of a Bank is calculated in accordance with the following formula:

NCI – ((T1s – Min) × SS)

where:

NCI is the total of the non-controlling interests of third parties in a consolidated subsidiary of the Bank.

T1s is the amount of Tier 1 capital of the subsidiary.

Min is the lower of:

(a) 8.5% of the total RWAs, as defined in BBR Rule 4.7 (2), of the subsidiary; and

(b) 8.5% of the share of consolidated RWAs of the group attributable to the subsidiary.

SS means the percentage of the shares in the subsidiary (being shares included in additional tier 1 capital) held by those third parties.

(3) A Bank must determine the amount of qualifying T1 Capital of a Subsidiary that is included in consolidated AT1 Capital by excluding the minority interests of that Subsidiary that are included in consolidated CET1 Capital, in accordance with BBR rule 4.22.

4.24 Criteria for Minority interests—tier 2 capital

(1) For rule 4.18 (c), an instrument (including common equity or any other T1 Capital instrument) issued by a consolidated subsidiary of a Bank and held by a third party as a non-controlling interest may be included in the Bank’s T2 Capital if the instrument would be included in the Bank’s T2 Capital had it been issued by the Bank.

(2) The amount to be included in the consolidated T2 capital of a Bank is calculated in accordance with the following formula:

NCI – ((T2s – Min) × SS)

where:

NCI is the total of the non-controlling interests of third parties in a consolidated subsidiary of the Bank.

T2s is the amount of tier 2 capital of the subsidiary.

Min is the lower of:

(a) 10.5% of the total RWAs, as defined in BBR Rule 4.7 (2), of the subsidiary; and

(b) 10.5% of the share of consolidated RWAs of the group attributable to the subsidiary.

SS means the percentage of the shares in the subsidiary (being shares included in tier 2 capital) held by those third parties.

(3) A Bank must determine the amount of qualifying Total Capital of a Subsidiary that is included in consolidated T2 Capital by excluding the minority interests of that Subsidiary that are included in consolidated CET1 Capital and consolidated AT1 Capital, in accordance with BBR rules 4.22 and 4.23.

4.25 Treatment of third party interests from special purpose vehicles

(1) An instrument issued out of a special purpose vehicle and held by a third party must not be included in a Bank’s CET 1 capital. Such an instrument may be included in the Bank’s AT1 or T2 Capital (and treated as if it had been issued by the Bank itself directly to the third party), if:

(a) the instrument satisfies the criteria for inclusion in the relevant category of regulatory capital; and

(b) the only asset of the special purpose vehicle is its investment in the capital of the Bank and that investment satisfies the criterion in rule 4.17 (15) or 4.19 (10) for the immediate availability of the proceeds.

(2) A capital instrument described in sub-rule (1) above that is issued out of a special purpose vehicle through a consolidated subsidiary of a Bank may be included in the Bank’s consolidated AT 1 or T2 Capital if the instrument satisfies the criteria in rule 4.23 or 4.24, as the case requires. Such an instrument is treated as if it had been issued by the subsidiary itself directly to the third party.

Section 4C Regulatory adjustments

4.26 Valuation approaches and related adjustments

(1) A Bank must use the same approach for valuing regulatory adjustments to its capital as it does for balance-sheet valuations. An item that is deducted from capital must be valued in the same way as it would be for inclusion in the Bank’s balance sheet.

(2) The Bank must use the corresponding deduction approach and the threshold deduction rule in making adjustments to its capital.

4.27 Definitions for Section 4C

In this Section:

entity concerned means any of the following entities:

(a) a Bank;

(b) any other financial or insurance entity;

(c) an entity over which a Bank exercises control.

significant investment, by a Bank in an entity concerned, means an investment of 10% or more in the common shares, or other instruments that qualify as capital, of the entity concerned.

investment includes a direct, indirect and synthetic holding of capital instruments.

4.28 Adjustments to Common Equity Tier 1 Capital (CET1 capital)

(1) Form of adjustments: Adjustments to CET 1 capital must be made in accordance with this Rule. Regulatory adjustments are generally in the form of deductions, but they may also be in the form of recognition or derecognition of items in the calculation of a Bank’s capital.

(2) Goodwill and intangible assets: A Bank must deduct from CET 1 capital the amount of its goodwill and all other intangible assets (except mortgage servicing rights). The amount must be net of any related deferred tax liability that would be extinguished if the goodwill or assets become impaired or derecognised under IFRS or any other relevant accounting standards.

(3) Deferred tax assets:

(a) A Bank must deduct from CET 1 capital the amount of deferred tax assets (except those that relate to temporary differences) that depend on the future profitability of the Bank.

(b) A deferred tax asset may be netted with a deferred tax liability only if the asset and liability relate to taxes levied by the same taxation authority and offsetting is explicitly permitted by that authority. A deferred tax liability must not be used for netting if it has already been netted against a deduction of goodwill, other intangible assets or defined benefit pension assets.

(4) Cash flow hedge reserve: In the calculation of CET 1 capital, a Bank must derecognise the amount of the cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows).

(5) Cumulative gains and losses from changes to own credit risk: In the calculation of CET 1 capital, a Bank must derecognise all unrealised gains and unrealised losses that have resulted from changes in the fair value of liabilities that are due to changes in the Bank’s own credit risk.

(6) Defined benefit pension fund assets:

(a) A Bank must deduct from CET 1 capital the amount of a defined benefit pension

fund that is an asset on the Bank’s balance sheet. The amount must be net of any related deferred tax liability that would be extinguished if the asset becomes impaired or derecognised under IFRS or any other relevant accounting standards.

(b) The Bank may apply to the AFSA for approval to offset from the deduction any asset in the defined benefit pension fund to which the Bank has unrestricted and unfettered access. Such an asset must be assigned the risk-weight that would be assigned if it were owned directly by the Bank.

(7) Securitisation gains on sale:In the calculation of CET 1 capital, a Bank must derecognise any increase in equity capital or CET 1 capital from a securitisation or resecuritisation transaction (for example, an increase associated with expected future margin income resulting in a gain-on- sale).

(8) Higher capital imposed on overseas branch

(a) If a Bank has an overseas branch, the Bank must deduct from CET 1 capital whichever is the higher of any capital requirement imposed by the AFSA or the financial regulator in the jurisdiction in which the branch is located.

(b) This rule does not apply if the overseas branch is a consolidated entity of the Bank.

A branch is a consolidated entity if it is included in the Bank’s consolidated returns.

(c) Despite sub-rule (b) above, if the financial regulator in the jurisdiction in which a branch is located imposes a capital requirement for the foreign branch, a banking Bank must deduct from CET 1 capital the amount of any shortfall between the actual capital held by the foreign branch and that capital requirement.

(9) Assets lodged or pledged to secure liabilities

(a) A Bank must deduct from CET 1 capital the amount of any assets lodged or pledged by the Bank if:

and

(i) the assets were lodged or pledged to secure liabilities incurred by the Bank;

(ii) the assets are not available to meet the liabilities of the Bank.

(b) The AFSA may determine that, in the circumstances, the amount of assets lodged or pledged need not be deducted from the Bank’s CET 1 capital. The determination must be in writing.

(10) Acknowledgments of debt

(a) A Bank must deduct from CET 1 capital the net present value of an acknowledgement of debt outstanding issued by it to directly or indirectly fund instruments that qualify as CET 1 capital.

(b) This rule does not apply if the acknowledgement is subordinated in rank similar to that of instruments that qualify as CET 1 capital.

(11) Accumulated losses: A Bank must deduct from CET 1 capital the amount of any accumulated losses.

4.29 Deductions from Regulatory Capital

(1) Deductions using corresponding deduction approach:

(a) The deductions that must be made from CET 1 capital, AT 1 capital or T2 capital under the corresponding deduction approach are set out in the rules 4.30 to 4.36. A Bank must examine its holdings of index securities and any underlying holdings of capital to determine whether any deductions are required as a result of such indirect holdings

(b) Deductions must be made from the same category for which the capital would qualify if it were issued by the Bank itself or, if there is not enough capital at that category, from the next higher category.

(c) The corresponding deduction approach applies regardless of whether the positions or exposures are held in the banking book or trading book.

Note If the amount of T2 capital is insufficient to cover the amount of deductions from that category, the shortfall must be deducted from AT1 capital and, if AT1 capital is still insufficient, the remaining amount must be deducted from CET 1 capital.

(2) Investments in own shares and capital instruments

(a) A Bank must deduct direct or indirect investments in its own common shares or own capital instruments (except those that have been derecognised under IFRS). The Bank must also deduct any of its own common shares or instruments that it is contractually obliged to purchase.

(b) The gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk. However, gross long positions in its own shares resulting from holdings of index securities may be netted against short positions in its own shares resulting from short positions in the same underlying index, even if those short positions involve counterparty risk.

(3) Reciprocal cross holdings: A Bank must deduct reciprocal cross holdings in shares, or other instruments that qualify as capital, of an entity concerned.

(4) Non-significant investments—where the Bank does not own more than 10% of issued common equity of the entity

(a) This rule applies if:

(i) a Bank makes a non-significant investment in an entity concerned;

(ii) the entity concerned is an unconsolidated entity (that is, the entity is not

one that is included in the firm’s consolidated returns);

(iii) the Bank does not own more than 10% of the common shares of the entity concerned; and

(iv) after applying all other regulatory adjustments, the total of the deductions required to be made under this rule is less than 10% of the Bank’s CET 1 capital.

(b) A Bank must deduct any investments in common shares, or other instruments that qualify as capital, of an entity concerned.

(c) The amount to be deducted is the net long position (that is, the gross long position net of short positions in the same underlying exposure if the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least 1 year).

(d) Underwriting positions held for more than 5 business days must also be deducted.

(e) If a capital instrument is required to be deducted and it is not possible to determine whether it should be deducted from CET 1 capital, additional tier 1 capital or tier 2 capital, the deduction must be made from CET 1 capital.

(5) Non-significant investments—aggregate is 10% or more of Bank’s CET 1 capital

(a) This rule applies if, after applying all other regulatory adjustments, the total of the deductions required to be made under rule 4.29 (4) is 10% or more of the Bank’s CET 1 capital.

(b) A Bank must deduct the amount by which the total of the deductions required to be made under rule 4.29 (4) exceeds 10% of the Bank’s CET 1 capital. This amount to be deducted is referred to as the excess.

(c) How much of the excess gets to be deducted from each category of regulatory capital under the corresponding deduction approach is calculated in accordance with the following formula:

where: Excess * A / B

A is the amount of CET 1 capital, additional tier 1 capital or tier 2 capital of the Bank, as the case may be.

B is the total capital holdings of the Bank.

(6) Significant investments

(a) This rule applies if:

(i) a Bank makes a significant investment in an entity concerned;

(ii) the entity concerned is an unconsolidated entity (that is, the entity is not

one that is included in the Bank’s consolidated returns); and

(iii) the Bank owns 10% or more of the common shares of the entity concerned.

(b) A Bank must deduct the total amount of investments in the entity concerned (other than investments in common shares, or other instruments that qualify as CET 1 capital, of the entity).

(c) The amount to be deducted is the net long position (that is, the gross long position net of short positions in the same underlying exposure if the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least 1 year).

(d) Underwriting positions held for more than 5 business days must also be deducted.

(e) If a capital instrument is required to be deducted and it is not possible to determine whether it should be deducted from CET 1 capital, AT1 capital or T2 capital, the deduction must be made from CET 1 capital.

(7) Banks may use estimates or exclude deductions

(a) If it is impractical for a Bank to examine and monitor the Bank’s exposures to the capital of entities concerned (including through holdings of indexed securities), the Bank may apply to the AFSA for approval to use an estimate of such exposures. The authority will grant such an approval only after the Bank satisfies the authority that the estimate is conservative, well-founded and reasonable.

(b) A Bank may also apply to the AFSA for approval not to deduct an investment made to resolve, or provide financial assistance to reorganise, a distressed entity.

4.30 Deductions from CET1 capital

(1) In addition to the other deductions to CET 1 capital under this Chapter, deductions may be required to CET 1 capital under the threshold deduction rule.

(2) The threshold deduction rule provides recognition for particular assets that are considered to have some limited capacity to absorb losses. The following items come within the threshold deduction rule:

(a) significant investments in the common shares, or other instruments that qualify as CET 1 capital, of an unconsolidated entity concerned;

(b) mortgage servicing rights;

(c) deferred tax assets that relate to temporary differences (for example, allowance for credit losses).

(3) Instead of full deduction, the items that come within the threshold deduction rule receive limited recognition when calculating CET 1 capital. The total of each of the items in subrule (2) do not require adjustment from CET 1 capital and are risk-weighted at 300% (for items listed on a recognised exchange) or 400% (for items not so listed) provided that:

(a) each item is no more than 10% of the Bank’s CET 1 capital (net of all regulatory adjustments except those under this Subdivision); or

(b) in total, the 3 items are no more than 15% of the Bank’s CET 1 capital (net of all

regulatory adjustments except those under this Subdivision).

(4) A Bank must deduct from CET 1 capital any amount in excess of the threshold in sub- rule (3) (a) or (b) above.

Section 4D Capital Buffers

4.31 Capital conservation buffer

(1) A Bank whose risk-based capital requirement is higher than its base capital requirement must maintain a minimum capital conservation buffer of:

(a) 2.5% of the Bank’s total risk-weighted assets; or

(b) a higher amount that the AFSA may, by written notice, set from time to time.

(2) A Bank’s capital conservation buffer must be made up of CET 1 capital above the amounts used to meet the Bank’s CET 1 capital ratio, T1 capital ratio and regulatory capital ratio in rule 4.12.

4.32 Capital conservation ratios

(1) If a Bank’s capital conservation buffer falls below the required minimum, the Bank must immediately conserve its capital by restricting its distributions.

(2) This rule sets out, in column 3 of table 4A, the minimum capital conservation ratios for Banks that are required to maintain a capital conservation buffer. Capital conservation ratio is the percentage of earnings that a Bank must not distribute if its CET 1 capital ratio falls within the corresponding ratio in column 2 of that table.

(3) A Bank must have adequate systems and controls to ensure that the amount of distributable profits and maximum distributable amount are calculated accurately. The Bank must be able to demonstrate that accuracy if directed by the AFSA.

(4) If the Bank is a member of a financial group, the capital conservation buffer applies at group level.

Table 4A Minimum capital conservation ratios

column 1 item

column 2 CET1 capital ratio

column 3

minimum capital conservation ratio (% of earnings)

1

4.5% to 5.125%

100

2

≥5.125% to 5.75%

80

3

≥5.75% to 6.375%

60

4

≥6.375% to 7.0%

40

5

>7%

0

4.33 Powers of the AFSA

(1) The AFSA may impose a restriction on capital distributions by a Bank even if the amount of the Bank’s CET 1 capital is greater than its CET 1 capital ratio and required capital conservation buffer.

(2) The AFSA may, by written notice, impose a limit on the period during which a Bank may operate within a specified capital conservation ratio.

(3) A Bank may apply to the AFSA to make a distribution in excess of a limit imposed by this Part. The authority will grant approval only if it is satisfied that the Bank has appropriate measures to raise capital equal to, or greater than, the amount the Bank wishes to distribute above the limit.

4.34 Capital reductions

(1) A Bank must not reduce its capital and reserves without the AFSA’s written approval.

(2) A Bank planning a reduction must prepare a forecast (for at least 2 years) showing its projected capital after the reduction. The Bank must satisfy the authority that the Bank’s capital will still comply with these rules after the reduction.

4.35 Authority can require other matters

Despite anything in these rules, the AFSA may require a Bank to have capital resources, comply with any other capital requirement or use a different approach to, or method for, capital management. The authority may also require a Bank to carry out stress- testing at any time.

Section 4E Leverage Ratio

4.36 Application

The rules in this section apply only to Banks. For the sake of clarity, the rules in this section apply only to Banks licensed by the AFSA to conduct the Regulated Activity of “Accepting Deposits”.

4.37 Calculation of Leverage Ratio

(1) A Bank must calculate its Leverage Ratio in accordance with the following formula:

Leverage Ratio = Capital Measure ÷ Exposure Measure

Where:

(a) “Capital Measure” represents T1 Capital of the Bank calculated in accordance with BBR rule 4.13; and

(b) “Exposure Measure” represents the value of exposures of the Bank calculated in accordance with (2) of this rule.

(2) For the purpose of determining the Exposure Measure, the value of exposures of an Bank must be calculated in accordance with the International Financial Reporting Standards (IFRS) subject to the following adjustments:

(a) on-balance sheet, non-derivative exposures must be net of specific allowances and valuation adjustments (e.g. credit valuation adjustments);

(b) physical or financial collateral, guarantees or credit risk mitigation purchased must not be used to reduce on-balance sheet exposures; and

(c) loans must not be netted with deposits.

Note Detailed guidance specifying the methodologies, parameters and formulae for calculating the Leverage Ratio are set out in Section D of Chapter 4 of the CAG issued by the AFSA.

Chapter 5 Credit Risk and Concentration Risk

Part I Credit Risk

Introduction

Guidance

1. This chapter sets out the regulatory requirements in respect of managing the Credit Risk exposures of a Bank. Credit Risk refers to risk of incurring losses due to failure on the part of a borrower or a counterparty to fulfil their obligations in respect of a financial transaction. This chapter aims to ensure that a Bank holds sufficient regulatory capital of acceptable quality so that it can absorb unexpected losses arising out of its Credit Risk exposures, should the need arise and that it continues to operate in a sustainable manner.

2. This chapter requires a Bank to:

(a) implement a comprehensive Credit Risk management framework to manage, measure and monitor Credit Risk commensurate with the nature, scale and complexity of its operations;

(b) calculate the Credit Risk Capital Requirement for its on-balance sheet and off- balance sheet credit exposures after adjusting for applicable levels of credit risk mitigation, according to the norms, methodologies, standards and guidance provided in the CAG issued by the AFSA;

(c) implement a sound framework for managing concentration risk and large exposures, including limits for concentration of such exposures to individual and group borrowers.

3. This Chapter also deals with the following elements of determination of regulatory capital requirements to support a Bank’s credit risk exposures:

● the risk-weighted assets approach;

● CRM techniques;

● Provisioning requirements for impaired assets of the Bank.

4. To guard against abuses and to address conflicts of interest, this Chapter requires transactions with related parties to be at arm’s length.

5. The detailed requirements specifying the calculation methodologies, parameters, metrics and formulae in respect of the primary credit risk management and credit risk capital requirements outlined in this chapter are provided in the Capital Adequacy Guideline (CAG) issued by the AFSA. The CAG also provides detailed guidance on calculation methodologies, formulae, parameters and norms involved in calculation of Credit Risk capital requirements which is an element used to calculate the capital adequacy ratios for a Bank, as set out in Chapter 4 of BBR. It is suggested that this Chapter of the BBR, be read in conjunction with Chapter 5 of the CAG issued by the AFSA to facilitate understanding of the regulatory requirements and compliance with them.

5.1 Credit Risk Management – Systems and Controls

(1) A Bank must implement and maintain comprehensive Credit Risk management systems which:

(a) are appropriate to the Bank’s type, scope, complexity and scale of

operations;

(b) enable the Bank to effectively identify, assess, monitor and control Credit

Risk and to ensure that adequate Capital is available to support the credit risk exposures assumed; and

(c) ensure effective implementation of the Credit Risk strategy and policy.

(2) A Bank must:

(a) identify, assess, monitor, mitigate and, control its Credit Risk; and

(b) implement and maintain a prudent Credit Risk management policy which enables it to identify, assess, monitor, control and mitigate its Credit Risk.

(3) The Credit Risk management policy must:

(a) be documented and approved by its governing body;

(b) include the Bank’s risk appetite for Credit Risk;

(c) be appropriate to the nature, scale and complexity of its activities and for its risk profile;

(d) must establish procedures, systems, processes, controls and approaches to identify, measure, evaluate, manage and control or mitigate its credit risk and to ensure the integrity of its credit risk management;

(e) must set out the organizational structure, and must define the responsibilities and roles, for managing credit risk;

(f) ensure that its risk management framework including but not limited to tools, methodologies and, systems enable it to implement its Credit Risk management policy; and

(g) be reviewed and updated at a reasonable frequency, but at least on an annual basis.

(4) A Bank’s credit risk management policy must establish:

(a) a well-documented and effectively-implemented process for assuming credit risk that does not rely unduly on external credit ratings;

(b) well-defined criteria for approving credit (including prudent underwriting standards), and renewing, refinancing and restructuring existing credit;

(c) a process for identifying the approving authority for credit, given its size and complexity;

(d) effective credit risk administration, including:

(i) regular analysis of counterparties’ ability and willingness to repay;

and

(ii) monitoring of documents, legal covenants, contractual requirements, and collateral and other CRM techniques;

(e) effective systems for the accurate and timely identification, measurement, evaluation, management and control or mitigation of credit risk, and

reporting to the Bank’s governing body and senior management;

(f) prudent and appropriate credit limits that are consistent with the Bank’s risk tolerance, risk profile and capital;

(g) provide for process and criteria for identification and recognition of problem assets as well as systems for measurement and reporting of problem assets;

(h) the criteria and responsibility for credit risk reporting, and the scope, manner and frequency of reporting, to the governing body or a committee of the governing body;

(i) establish, and must provide for the regular review of, the Bank’s credit risk

tolerance and credit exposure limits to control credit exposures of the Bank;

(j) procedures for tracking and reporting exceptions to credit limits and deviations from credit risk management policies; and

(k) effective controls for the quality, reliability and relevance of data and validation procedures.

Note Guidance in respect of the contents of a Bank’s Credit Risk management policy which is required to satisfy the regulatory requirement in the Rule 5.1 is provided in Chapter 5 of the CAG issued by the AFSA.

(5) A Bank’s credit risk management policy must ensure that credit decisions are free of conflicts of interest and are made on an arm’s-length basis. In particular, the credit approval and credit review functions must be independent of the credit initiation function.

(6) A Bank’s credit risk management policy must provide for monitoring the total indebtedness of each counterparty and any risk factors that might result in default (including any significant unhedged foreign exchange risk).

(7) A Bank must give the AFSA full access to information about its credit portfolio. The Bank must also give the AFSA access to staff involved in assuming, managing and reporting on credit risk.

(8) The Credit Risk management policy must enable the Bank to carry out stress-tests on its credit portfolio at intervals appropriate for the nature, scale and complexity of the Bank’s business and using various scenarios based on appropriate assumptions. The policy must take into account the Bank’s credit risk profile (including on-balance-sheet and off-balance-sheet exposures) and tolerance in the context of the markets and macroeconomic conditions in which the Bank operates. The Bank’s credit risk stress testing must include procedures to make any changes to its credit risk management framework based on the results from the stress testing.

Note Guidance in respect of a Bank’s policies for Credit Risk assessment which is required to satisfy the regulatory requirement in the Rule 5.1 is provided in paragraphs 10 & 11 of Chapter 5 of the CAG issued by the AFSA.

5.2 Role of governing body—Credit Risk

(1) A Bank’s governing body must ensure that its Credit Risk management policy enables it to obtain a comprehensive Bank-wide view of its Credit Risk exposures and covers the full credit lifecycle including credit underwriting, credit evaluation, and the credit risk management of the Bank’s trading activities.

(2) A Bank must ensure that its Governing Body is responsible for monitoring the nature and level of Credit Risk assumed by it and for monitoring the Credit Risk management process.

(3) The governing body of the Bank must also ensure that:

(a) an appropriate senior management structure with clearly defined responsibilities and roles for Credit Risk management and for compliance with the Bank’s Risk strategy, is established and maintained;

(b) the credit risk management framework is consistent with the Bank’s risk

profile and its systemic importance.

(c) the Bank’s senior management and other relevant staff have the necessary experience to manage Credit risk and to effectively implement the Credit risk management policy;

(d) appropriate Credit limits covering Credit Risk management in both day-to-day and stressed conditions are set;

(e) stress-tests, funding strategies, contingency funding plans and holdings of high-quality liquid assets are effective and appropriate for the Bank;

(f) the Bank’s senior management:

(i) develops a Credit risk management policy in accordance with the

Bank’s Credit risk tolerance;

(ii) monitors the Bank’s Credit risk profile and reports to the governing

body regularly;

(iii) determines, and sets out in the Bank’s credit risk management policy, the structure, responsibilities and controls for managing credit risk and for overseeing the credit risk of all legal entities, branches and subsidiaries in the jurisdictions in which the Bank is active; and

(iv) monitors trends and market developments that could present significant, unprecedented or complex challenges for managing credit risk so that appropriate and timely changes to the credit risk management policy can be made.

(4) The governing body must regularly review reports on the Bank’s Credit Risk profile and portfolio returns and, where necessary, information on new or emerging problem assets. The governing body of the Bank must also review the Credit Risk tolerance and strategy at least on an annual basis.

(5) The governing body must approve:

(a) the Bank’s Credit Risk management policy; and

(b) its Credit risk tolerance and risk strategy.

5.3 Classification of Credit exposures

(1) Unless a Bank has established something more detailed, the Bank must classify credits into 1 of the 5 categories in table 5A. Nothing in the table prevents a Bank from classifying a credit under a higher risk category than the table requires.

(2) Unless there is good reason not to do so, the same category must be given to all credit exposures to the same counterparty

Annex 1_AIFC FinTech Rules

PART 1. INTRODUCTION

1.1. Title

These Rules may be cited as the AIFC Financial Technology Rules (or AIFC FinTech Rules).

1.2. Commencement

These Rules commence on [TBD February] 2019.

1.3. Application

These Rules apply within the jurisdiction of the AIFC.

1.4. Interpretations

Words and expressions used in these Rules and interpretative provisions applying to these Rules are specified in the Glossary.

1.5. Administration of the Rules

These Rules are administered by the Chief FinTech Officer (hereinafter, the

“CFTO”) of the AFSA FinTech Office.

PART 2. FINTECH LAB

2.1. General introduction to FinTech Lab

2.1.1. The FinTech Lab is a regulatory environment within the AIFC that allows a Person to Test and/or Develop the FinTech Activities without immediately incurring full set of regulatory requirements envisaged under the AIFC acts for Regulated and Market Activities.

2.1.2. FinTech Lab is designed to deliver more effective competition in the interests of consumers by:

(a) reducing the time and, potentially, the cost of getting FinTech to market;

(b) enabling greater access to finance for innovators, including start-ups;

(c) allowing the AFSA to collaborate with the applicant to ensure that appropriate consumer protection safeguards are built into their FinTech Activities; and

(d) enabling more FinTech Activities to be Tested and/or Developed, thus, potentially introduced to the market.

2.1.3. Given that the FinTech Lab is a live environment, Testing and/or Developing the FinTech Activities in the FinTech Lab may result in financial loss or other risks to the FinTech Lab Participants, their customers and the financial system.

2.1.4. The FinTech Lab is not intended to create a risk‐free FinTech environment, rather incorporates appropriate safeguards to identify and manage potential risks that promotes the FinTech Activities, however, minimises the risks of poor customer outcomes posed by these FinTech Activities.

2.2. Testing the FinTech Activities

2.2.1. Eligibility Criteria

(a) The regime of Testing the FinTech Activities is a live environment which allows a Person to test the validity of the following types of activities in a cost-effective and time-bound manner, in close collaboration with the AFSA:

1. Financial Activities which are similar to those that are already being regulated in the AIFC, where:

i. a different technology or process is being applied; or

ii. the same technology is being applied differently; or

2. Financial Activities not regulated in the AIFC; or

3. Activities likely to be regulated in the AIFC as a financial or an ancillary service.

(b) The FinTech Activities specified in (a) above, should bring benefits to consumers, which may include, for example, improvement accessibility, efficiency, security and quality in the provision of financial services, promoting better risk management solutions and regulatory outcomes for the financial industry.

2.3. Developing the FinTech Activities

2.3.1 Eligibility Criteria

4. The regime of Developing the FinTech Activities is a live market environment in which a Person can engage into the activities that are currently regulated or not regulated by the AFSA without immediately incurring full set of regulatory requirements envisaged under the AIFC acts for Regulated and Market Activities.

5. The regime of Developing the FinTech Activities is tailored in the circumstances where:

(i) it is less clear whether the proposed FinTech Activity would have demand in Kazakhstani or regional market (test the waters), or

(ii) an applicant is a start-up that does not meet full-set of requirements for the regulated activities but seeks to deploy the FinTech Activities and comply with regulatory obligations gradually, or

(iii) an applicant holds a licence to operate the proposed FinTech Activity in other jurisdiction(s) which is not currently regulated by the AFSA.

6. For the purposes of 2.3.1(b), the FinTech Activities eligible for being Developed include those that fall under the Regulated and/or Market Activities specified in GEN Schedule 1 and/or Framework Regulations Schedule 3, and other non-regulated by AFSA activities.

2.4. Application process

2.4.1. General overview

(a) A Person seeking to Test and/or Develop the FinTech Activities within the FinTech Lab must qualify the eligibility criteria specified in 2.2.1. and 2.3.1. and satisfy the application requirements specified in 2.4.3(b) to get an authorisation.

(b) A Person may apply to the AFSA for a Licence authorising a Centre Participant to Test and/or Develop the FinTech Activities by:

(i) completing the pre-application and application form and filing such completed form with the AFSA accompanied by such documents as are specified in the form; and

(ii) providing such further information as the AFSA may require.

2.4.2. Pre-application form

(a) The pre-application form is designed to verify eligibility of a Person to Test and/or Develop the FinTech Activities within the FinTech Lab.

(b) The pre-application form is further designed to provide an insight to the AFSA regarding the proposed FinTech and to verify its suitability for support from the FinTech Lab as well as allows the applicant to familiarize with the AFSA’s approach in fostering innovation within the FinTech Lab.

(c) A Person must justify compliance with the eligibility criteria to proceed further with the application form.

2.4.3. Application form

(a) Once the AFSA is satisfied that the Person meets the edibility criteria, such Person can complete and submit an application form for obtaining a License to carry on a Testing and/or Developing the FinTech Activities.

(b) In assessing the application, the AFSA will consider whether:

(i) the Person has performed a rigorous due diligence on legal and regulatory requirements of AIFC for deploying the proposed FinTech Activities and understands them;

(ii) the Person has identified the risks discovered from the preliminary testing and the potential risks to financial industry and consumers that may arise from the Testing and/or Developing of the proposed FinTech Activities in the FinTech Lab, and has proposed appropriate safeguards to address the identified risks to the best of its ability;

(iii) the Person has the necessary financial and non-financial resources to support Testing and/or Developing the FinTech Activities in the FinTech Lab; and

(iv) the Person has prepared the business, testing and/or development plan(s).

(c) The AFSA reviews the application within up to 30 business days from the date of receipt and informs the applicant on authorisation decision within 3 business days.

(d) The procedures of assessing the application, terms and conditions of issuance of the License is defined by the AFSA.

(e) Nothing in these Rules prevents the Person whose application had been rejected to apply to the FinTech Lab again, provided that the reasons causing the rejection of application have been addressed or the different FinTech Activities or the same FinTech Activities under the different business model shall be proposed for being Tested and/or Developed by that Person.

2.5. Licence

2.5.1. General

(a) Person must not Test and/or Develop the FinTech Activities within the FinTech Lab unless it holds a License issued by the CFTO.

(b) A Licence issued by the CFTO, which can be subject to the set of conditions, serves as an authorisation of a Centre Participant to:

(i) Test the FinTech Activities within the FinTech Lab; and/or

(ii) Develop the FinTech Activities within the FinTech Lab.

(c) The Licence has effect for 2 years from the date of its issuance.

2.5.2. Extension, varying, withdrawal of the Licence

(a) The FinTech Lab Participant is entitled to apply to the AFSA to extend, vary or withdraw the Licence.

(b) The FinTech Lab Participant submits application for the Licence extension at least 2 months prior to the Licence expiration date.

(c) The FinTech Lab Participant is entitled to apply to the AFSA to extend the validity, to change the scope, to have a condition/restriction varied or withdrawn, or to have its Licence withdrawn by:

(i) filing the form with the AFSA accompanied by such documents as are specified in the form or as may be requested by the AFSA;

(ii) providing such further information as the AFSA may require.

(d) Each application for an extension, varying or withdraw of the Licence must be accompanied by the sufficient reasons behind such an application.

(e) In the case of withdrawal of the Licence, the FinTech Lab Participant follows the procedure specified in 2.5.3(d) of these Rules.

(f) The CFTO approves the extension, varying or withdrawal of the Licence on a case-by-case basis at his/her own discretion.

(g) The CFTO’s decision on the extension, varying or withdrawal of the Licence is final.

(h) The CFTO may vary the terms of the Licence on his/her own initiative and at his/her own discretion based on the progress of the FinTech Lab Participant in Testing and/or Developing the FinTech Activities.

2.5.3. Suspension, revocation of the Licence

(a) The CFTO may suspend the Licence based on an application of the FinTech Lab Participant.

(b) The CFTO is entitled to suspend or revoke all or some of the terms of the Licence or the full Licence at his/her own discretion.

(c) For the purposes of 2.5.3(b), the CFTO may exercise its power only if the CFTO:

(i) is satisfied that there is a breach, or likely breach of a provision of legislation administered by the AFSA; or there is a failure, or likely failure, to comply with any obligation to which the FinTech Lab Participant is subject under the Licence;

(ii) considers that the exercise of the power is necessary or desirable in the interests of the AIFC as the risks posed by the Tested and /or Developed FinTech Activities exceed the benefits to consumers or the financial system.

(d) Upon revocation or withdrawal of the Licence, the FinTech Lab Participant must:

(i) immediately implement its exit strategy to cease the provision of the FinTech to new and existing customers;

(ii) provide notification to customers informing them of the cessation and their rights to redress, where relevant;

(iii) compensate any customers who had suffered the incurred financial losses from engaging with the FinTech Lab Participant pursuant the safeguards submitted by the FinTech Lab Participant while the application for authorisation;

(iv) ensure all the existing obligations to its customers must be fully fulfilled or addressed before exiting the FinTech Lab; and

(v) submit a final report to the AFSA on the actions taken pursuant the paragraph 2.7.3. of these Rules within 30 days after the revocation or withdrawal.

2.6. Waivers, conditions, restrictions

2.6.1. General

(a) The regime of Testing and/or Developing the FinTech Activities envisages the blank-sheet approach as the normal regulatory requirements applicable to the AIFC Participants, to whom the Framework Regulations apply, would initially not apply to the Person to carry on the Regulated Activity of Testing and / or Developing the FinTech Activities within the FinTech Lab.

(b) The AFSA may, on the application of a Person or its own initiative and by written notice, waive or modify the conditions, restrictions and/or requirements of the AIFC Regulations or Rules made thereunder, and define the appropriate boundary conditions at authorization and through different stages of Testing and / or Developing the FinTech Activities.

2.7. Reporting

2.7.1. Monitoring

(a) The FinTech Lab Participant is subject to the monitoring from the AFSA throughout the Licence validity period, whereby the FinTech Lab Participant submits the information on fulfilling of the testing and/or developing plan according to the paragraph 2.4.3(b)(iv) of these Rules.

(b) The FinTech Lab Participant must ensure proper maintenance of records during the Testing and/or Developing period to support reviews of the testing and/or developing plan by the AFSA.

2.7.2. Interim reports

(a) The FinTech Lab Participant must submit interim reports to the AFSA on the progress of fulfilment of the testing and/or developing plan, which may, without limitations, include information on the following:

(i) key performance indicators, key milestones and statistical information;

(ii) key issues arising as observed from fraud or operational incident reports; and

(iii) actions or steps taken to address the key issues referred to in (ii) above.

(b) The frequency and specific details for reporting, depends on duration, complexity, scale and risks associated with the Testing and/or Developing the FinTech Activities and shall be defined by AFSA.

2.7.3. Final report

(a) The FinTech Lab Participant must submit a final report containing the following information to the AFSA within 30 calendar days from the expiry, or the revocation, or withdrawal of the Licence:

(i) key outcomes, key findings of the Testing and/or Developing the FinTech Activities;

(ii) a full account of all incident reports and resolution of customer complaints (if any); and

(iii) in the case of a failed Test and/or Development – the lessons learnt from the Test and/or Development.

2.8. Miscellaneous

2.8.1. Upon expiry of the Licence’s validity, the legal and regulatory requirements which have been tailored, waived or modified by the AFSA will expire.

2.8.2. Unless the extension of the Licence is requested pursuant paragraph 2.5.2. of these Rules, or at such time as otherwise might be necessary and agreed by the CFTO, the FinTech Lab Participant will have to exit the FinTech Lab and choose to either:

(a) migrate to the full authorisation and supervisory regime under the AIFC regulatory framework and deploy its FinTech on a broader scale; or

(b) continue a business as a non-regulated activity under the commercial license obtained from the Registrar of Companies;

(c) employ an exit strategy and follow the procedure specified in paragraph 2.5.3(d).

2.8.3. Migration to full authorisation is possible provided that:

(a) both AFSA and the FinTech Lab Participant are satisfied that the intended Test and/or Development outcomes are achieved; and

(b) the FinTech Lab Participant can fully comply with the relevant legal and regulatory requirements envisaged under the AIFC acts to carry on the Regulated and/or Market Activities.

2.8.4. The FinTech Lab Participant may continue its business under the commercial licence obtained from the Registrar of Companies in certain circumstances when, for instance, the Tested and/or Developed FinTech Activities remain non-regulated by the AFSA, or when the intention of the FinTech Lab Participant or its financial/non-financial resources suggests continuing the business as a non-regulated by the AFSA activity.

2.8.5. The exit strategy of the FinTech Lab Participant may vary based on commercial needs, and may include the ceasing the business, or transferring the FinTech and engaged customers to the other authorised financial institution(s).

PART 3. THE AFSA FINTECH OFFICE

3.1. Overview

3.1.1. The FinTech Lab is administered by CFTO who has an office established within the framework of AFSA.

3.1.2. In exercising the CFTO’s functions, the CFTO must act in an independent way, even though the CFTO is an agent of the AFSA.

3.2. Objectives and functions

3.2.1. Objectives

(a) In exercising the CFTO’s functions, the CFTO acts in an independent and

non-biased way.

(b) The CFTO exercises the CFTO’s functions only in pursuit of the following CFTO’s objectives:

(i) to promote good practices and observance of the requirements of these Rules;

(ii) to pursue effectiveness and transparency in administering of these Rules.

3.2.2. Functions

(a) The CFTO has the functions given to the CFTO by or under the AIFC Acts, decisions of Governor and AFSA Executive Body.

(b) Without limiting the paragraph (a), the CFTO’s functions include the following:

(i) preparing draft rules, standards and codes of practice and submitting them to the AFSA Board Legislative Committee for consideration;

(ii) preparing and adopting non-binding guidance for the AIFC Participants, and advising the Board of Directors of the AFSA of any guidance adopted by the CFTO;

(iii) issuing or adopting the necessary forms, procedural guidance and other necessary documents pertinent to these Rules;

(iv) initiating and convening the AFSA Committee on authorisation of the FinTech Lab applicants;

(v) devising the tailored regulatory regime for the FinTech Lab Participant to Test and/or Develop the FinTech Activities within the FinTech Lab, including, without limitations, the following:

i. modify eligibility criteria on a case by case basis at his/her own discretion with due consideration of risks posed by the proposed FinTech; and/or

ii. impose waivers, conditions, restrictions and cancel and/or vary any waiver, condition, restriction; and/or

iii. impose such further waiver, condition, restriction as it may think fit; and/or

iv. issue an individual guidance subject to specific characteristics and risk(s) posed by the FinTech Activity; and/or

v. vary the applicable legislative requirements as the FinTech Lab Participant progress through different stages of Testing and/or Developing the FinTech Activities.

(vi) holding the signature right over various legal matters:

i. approve the form of the Licence and other application forms, make modifications thereto;

ii. issue of the Licence;

iii. modify, suspend or revoke the Licence at any time at his/her own discretion due to necessity to pursue one or more regulatory objective.

3.2.3. Other powers

(a) These Rules are not an exhaustive source of the CFTO’s policy on the exercise of its statutory powers and discretions. In discharge of its regulatory mandate, the CFTO is entitled to exercise other powers or functions which the CFTO considers necessary or desirable for or in connection with, or reasonably incidental to, the exercise of the CFTO’s functions, where it might be relevant to address any specific matter in FinTech.

(b) The CFTO may delegate all or any of the CFTO’s functions to any AFSA employee.

(c) The CFTO, and any delegate of the CFTO, is not liable to third parties for anything done or omitted to be done in the exercise or purported exercise of the CFTO’s functions (including any function delegated to the CFTO) under the AIFC Acts, decisions of Governor and AFSA Executive Body, except when it is established that such an action or omission was committed with unfair intentions and/or malicious intent and/or for the purpose of deliberate non-fulfillment or violation of his/her official duties.

Consultation Paper on Regulation of digital banking services

PART A - INTRODUCTION

Comments to be addressed to:

R.Abdirassilov@aifc.kz


1.Scope and Purpose


1.1 This paper presents a proposed policy to be adopted by the Astana Financial Services Authority (the "AFSA") for the regulation of digital banking services in the Astana International Financial Services Centre (the "AIFC") (the "Framework").

1.2 Terms not defined herein have the meaning given to them in the AIFC Glossary.

1.3 The proposed Framework will aid the economic and social development of Kazakhstan by diversifying who provides banking services, what those banking services are and how Clients[1] use these services.

1.4 This will support the five-year programme for 'Digital Kazakhstan', which is seeking to improve the competitiveness of Kazakhstan’s economy and quality of life through the progressive development of the digital ecosystem. This programme also includes the development of financial technologies, non-cash payments and electronic commerce, as well as progressive regulations that create a vibrant environment to promote greater inclusion and innovation. The AFSA is being supported by and working with the European Bank of Reconstruction and Development (the "EBRD") in implementing aspects of the 'Digital Kazakhstan' programme within the AIFC. The AFSA and the EBRD are engaging consultants, such as Clifford Chance in this case, to assist it with this programme. The proposed Framework is a part of this programme.

1.5 The aim of the proposed Framework is to enhance and build on the existing regulatory framework in order to support the licensing of digital-only banks and to regulate banking services provided remotely (e.g. online; in a mobile app), in support of the introduction of "Open Banking".

1.6 The proposed Framework will provide regulatory certainty to Authorised Firms providing banking services, and to their Clients. It will also promote new and innovative ways for banking services to be provided in the AIFC. 


2. Background


2.1 Digital banking is transforming how banking services are provided around the world. It is expanding the ways that banking services can be offered, which is opening it up to clients that were previously under-served. This means that traditional banking products, such as accepting deposits and providing credit, do not need to be offered through physical branches, but can be provided remotely; for example, online or in a mobile app. Clients can therefore access more banking services in any location.

2.2 In addition, the concept of 'Open Banking' has gained traction over the past few years. This allows a client's banking data to be used not only by his or her own bank, but also by third party providers in order to enable the provision of new products and services which will benefit clients. It establishes a secure way for a wide variety of providers to access a client's banking information and receive improved financial services and other related services.

2.3 Over the past few years, an increasing number of jurisdictions have been putting in place the regulatory infrastructure to enable remote access through digital banking, and to develop 'Open Banking'. Against this background, the AIFC is seeking to put in place the proposed Framework so that Kazakhstan can benefit from these developments and become an attractive location for both local and international providers of such services.


[1]    As per the AFSA Glossary, "Clients" is a broad term including individuals, corporate and government bodies, which can be located within Kazakhstan or externally.

PART B – REGULATORY APPROACH

3. Overview and Scope of Activities

3.1 The proposed Framework is being developed by the AFSA as part of its plan to enhance regulatory policies aimed at facilitating the adoption of technological innovations in the AIFC.

3.2 In formulating the proposed Framework, it has been proposed to:

  1. 3.2.1 develop a standalone regulatory framework for digital-only banks (please see Sections 5 to 8 below with respect to "Authorised Digital Banks" and "Authorised Digital Banks (Limited Licence)");
  2. 3.2.2 offer a phased approach to full authorisation for digital-only banks to encourage new providers into the AIFC (i.e., to lower the barriers to entry into the banking market) (please see Section 8 below with respect to "Authorised Digital Banks (Limited Licence)");
  3. 3.2.3 consider ways to access online banking;
  4. 3.2.4 define new Regulated Services to permit 'Open Banking' activities;
  5. 3.2.5 consider what additional infrastructure may need to be developed so that 'Open Banking' can operate fully; and
  6. 3.2.6 put in place suitable safeguards that recognise and address the security and other challenges posed by digital banking.

3.3 Following various policy discussions, it has been decided to include provisions related to "Open Banking" in the separate Payment Services and Electronic Money Framework ("PSEM Framework").


4. Legislation

4.1 When developing the proposed digital banking framework, the starting point will be to review the existing AIFC Acts which apply to Banks generally. When conducting this review, the question in each case will be: should this rule apply to an Authorised Digital Bank and, if so, does the rule need to be modified in any way in respect of its application to Authorised Digital Banks. The acts to be reviewed are:

  1. 4.1.1 AIFC Financial Services Framework Regulations (“FSFR”);
  2. 4.1.2 AIFC General Rules (“GEN”);
  3. 4.1.3 AIFC Conduct of Business (“COB”);
  4. 4.1.4 AIFC Banking Business Prudential Rules ("BBR");
  5. 4.1.5 AIFC Market Rules ("MAR");
  6. 4.1.6 AIFC Anti-Money Laundering, Counter – Terrorist Financing and Sanctions Rules (“AML”);
  7. 4.1.7 AIFC Fees Rules ("FEES"); and
  8. 4.1.8 AIFC Glossary.

4.2 New rules for digital-only banks will also be drafted - the new AIFC Digital Bank Rules ("DBR").  

PART C – SUMMARY OF POLICY POSITIONS

5. Digital-Only Banks - Scope


5.1 Traditionally, banks have physical infrastructure through which they provide banking services to clients. For example, retail banks operate networks of branches where clients receive key banking services (e.g. open bank accounts) and they provide ATMs where clients can withdraw cash from their bank accounts (either through their own ATM network or through an agent bank's ATM network). 

5.2 The AIFC wants to establish a regulatory framework for digital-only banks. The aim of this is to enable Clients to receive banking services remotely, without the need for the physical infrastructure of traditional banks. In order to achieve this, there would need to be sufficient technological infrastructure (both at a network level and at a corporate/individual level) and technological literacy. Enabling Clients to receive banking services remotely would benefit them, as they would have immediate access to banking services wherever they are. Digital-only banks would also benefit from reduced operating costs.

5.3 Digital-only banks will need to be defined to distinguish them from traditional banks. We propose that the core concept of the definition is a bank which provides only digital banking services, and which has only limited physical infrastructure. For example, it could have a head office but no branch network. Digital kiosks and ATMs will be permitted in order to help attract Clients and assist with Client on-boarding and Client queries (such kiosks could be manned or unmanned).

5.4 Applicants would have their own application process (see Section 6 below) to become "Authorised Digital Banks", and their own rules, the DBR (see Section 7 below). Please also see Section 8 below where it is proposed that there is an intermediate step for "Authorised Digital Banks (Limited Licence)", where more limited rules would apply.

5.5 Authorised Digital Banks will come within the definition of Authorised Firms, as will Authorised Digital Banks (Limited Licence). We understand that under the Payment Services and Electronic Money ("PSEM") Policy Paper, certain Authorised Firms do not need separate authorisation to carry out the new payment services Regulated Activity; such Authorised Firms include those with permission to Accept Deposits, Provide Credit and Provide Money Services. Authorised Digital Banks with these permissions will not therefore require separate authorisation to provide payment services as a Regulated Activity.

5.6 There is then also a policy question around whether Authorised Digital Banks should be permitted to carry out the new Regulated Activity under the PSEM Framework of issuing electronic money. Our view is that Authorised Digital Banks should be permitted to do so on the basis that this would be consistent with the banking and payment services activities that Authorised Digital Banks are proposed to be able to carry out and supportive of the general objectives for the DBRs, of expanding the use of financial technology and non-cash payments within the AIFC.

5.7 Authorised Digital Banks would be limited to providing certain existing Regulated Activities set out in Schedule 1 (Regulated Activities) to the AIFC General Rules ("GEN")[1]. They would be allowed to carry out the following Regulated Activities:

  1. 5.7.1 17. Accepting Deposits;
  2. 5.7.2 18. Providing Credit; and
  3. 5.7.3 26. Opening and Operating Bank Accounts.
  4. They may then also carry out one or more of the following Regulated Activities:
  5. 5.7.4 19. Advising on a Credit Facility; and/or
  6. 5.7.5 21. Providing Money Services.

5.8 In addition, Authorised Digital Banks will be permitted to carry out the new Payment Services Regulated Activity, proposed as part of the PSEM Framework, including those activities introduced for "Open Banking". Further review will be required of the PSEM Framework, once drafted, to ensure that the DBRs and the PSEM Framework are consistent. Given the broad definition of Client in the AIFC Glossary, Authorised Digital Banks could not only provide these Regulated Activities and other non-regulated activities to corporates etc., but also to other banks or financial institutions. Authorised Digital Banks will also be able to accept limited deposits of up to USD 10,000 from Retail Clients, unlike other Banks in the AIFC.

5.9 Another issue is as to whether there should be any limit on an Authorised Digital Bank when providing credit to Retail Clients. Policy options for AFSA here include:

  1. 5.9.1 allowing Authorised Digital Banks to provide unlimited credit to Retail Clients in the same way that an existing AFSA-authorised Bank would be permitted to;
  2. 5.9.2 allowing Authorised Digital Banks to provide microloans of up to USD 10,000 only per Retail Client;
  3. 5.9.3 allowing Authorised Digital Banks to provide microloans of up to USD 10,000 per Retail Client but permitting uncapped loans to Retail Clients where either:
  4. (a)the funds for loans over the USD 10,000 cap are not derived from client deposits; or
  5. (b)reasonable and proportionate security for the loan is taken by the Authorised Digital Bank.

5.10 In our view, there are pros and cons for each of these approaches, based on considerations including consumer protection, ease of implementation and enforcement and ensuring that Authorised Digital Banks are able to grow stable and sustainable businesses. Whilst capping the amount that can be loaned to each Retail Client may be an appropriate way of protecting consumers, allowing Authorised Digital Banks some flexibility to provide further credit to such customers, especially with additional protections, also seems worthwhile in order to support sustainable business growth.

5.11 The application process for becoming an Authorised Digital Bank will allow for an Authorised Firm that is not an Authorised Digital Bank to set up a subsidiary which is an Authorised Digital Bank, or itself become an Authorised Digital Bank, subject to meeting relevant criteria. The AFSA shall have discretion to accelerate the Authorised Digital Bank (Limited Licence) phase for an existing AFSA-authorised Bank wishing to become an Authorised Digital Bank or to establish a subsidiary which is an Authorised Digital Bank.


6.DIGITAL-ONLY banks – Applications


6.1 Applicants to become Authorised Digital Banks will have their own set of application forms. This will include choosing which of the Regulated Activities that are available to Authorised Digital Banks the applicant wishes to provide (see Section 5.5 above).


7. DIGITAL-ONLY banks - Rules


7.1 The AFSA wishes to make its regime attractive to digital-only banks. Part of its appeal will be to reduce unnecessary burdens in the application process. A key part of the work that an applicant will do is to assess the rules that will apply to it.

7.2 The AFSA will need some new rules for Authorised Digital Banks. These will be set out the DBR. In particular, the DBR will set out what defines an Authorised Digital Bank, the application process and any requirements specific to Authorised Digital Banks. The DBR will also do this for Authorised Digital Banks (Limited Licence) (see Section 8 below). As noted in Section 11, there are certain security and consumer protection provisions which should be put in place where banking and other services are provided remotely. As these will also be relevant to other Authorised Firms who provide such services remotely, these will not be included in the DBRs but may be issued as separate guidelines by the AIFC or be included in another AIFC Rulebook (e.g. in the AIFC General Rules or the rules to be drafted for the new PSEM Framework).

7.3 In addition, some existing AIFC Acts applicable to other types of firms will also apply to Authorised Digital Banks. Current rules which may need to apply to Authorised Digital Banks are contained in the following AIFC Acts:

  1. 7.3.1 AIFC Financial Services Framework Regulations (“FSFR”);
  2. 7.3.2 AIFC General Rules (“GEN”);
  3. 7.3.3 AIFC Conduct of Business (“COB”)[2];
  4. 7.3.4 AIFC Banking Business Prudential Rules ("BBR");
  5. 7.3.5 AIFC Market Rules ("MAR")[3];
  6. 7.3.6 AIFC Anti-Money Laundering, Counter-Terrorist Financing and Sanctions Rules (“AML”);
  7. 7.3.7 AIFC Fees Rules ("FEES"); and
  8. 7.3.8 AIFC Glossary.

New rules are also currently being developed under the PSEM Framework, some of which (such as conduct of business rules) will also apply to Authorised Digital Banks when carrying out payment services; these rules will need to be considered when drafting the DBRs.

7.4 Whilst it would be simpler for Authorised Digital Banks to have all their rules in one place (e.g. no need to follow cross-references to other parts of the AIFC Acts), it would create a lengthy rulebook. In addition, care would need to be taken that any future updates are reflected, where relevant, in both the existing AIFC Acts and in the DBR. Instead, the DBR will set out only specific new rules applicable to Authorised Digital Banks or, existing rules which need to be modified when they apply to Authorised Digital Banks. It will also cross reference however to other existing rules in existing AIFC Acts which will apply to Authorised Digital Banks, to help make the DBR easier to follow, without setting out these existing rules in full.  

7.5 The BBR sets out detailed requirements for Banks, including principles relating to Banking Business, prudential reporting requirements, capital adequacy, credit risk and concentration risk, market risk, operational risk, interest rate risk in the Banking Book, liquidity risk, group risk, supervisory review and evaluation process and public disclosure requirements. It is understood that these will also apply in full to Authorised Digital Banks (but not for an Authorised Digital Banks (Limited Licence) as discussed in Section 8 below).  

7.6 Authorised Digital Banks will also require corporate governance rules. Currently, corporate governance rules for listed entities are set out in MAR and apply to a Reporting Entity, which is a Person who: (i) has Securities or Units admitted to an Official List; (ii) is the Fund Manager of a Listed Fund; or (iii) is declared by the AFSA to be a Reporting Entity. To the extent that an Authorised Digital Bank is a Reporting Entity, they will be subject to these rules, in the same way as other Banks under AFSA's current approach.


8. DIGITAL-ONLY Banks – Authorised Digital Bank (Limited licence)


8.1 In order to encourage new entrants to the banking sector, there will be an intermediary stage between applying for and becoming a full Authorised Digital Bank. This will allow applicants to provide limited Regulated Activities and to not be subject to the full set of rules for an Authorised Digital Bank. They are intended to be known as Authorised Digital Banks (Limited Licence). This is similar to the approach taken in Singapore and is designed to lower the barriers to entry to new entrants to the banking sector.

8.2 All applicants to become an Authorised Digital Bank must first become an Authorised Digital Bank (Limited Licence), until the AFSA have carried out an evaluation to check that the Authorised Digital Bank (Limited Licence) has satisfied certain conditions and can become an Authorised Digital Bank. The Authorised Digital Bank (Limited Licence) phase will be time limited period and an Authorised Digital Bank (Limited Licence) will be required to cease doing business in the AIFC if they fail to satisfy the AFSA's evaluation to become an Authorised Digital Bank within the required time period.

8.3 Limitations on an Authorised Digital Bank (Limited Licence) being considered include:

  1. 8.3.1 when providing the Regulated Activities of Accepting Deposits and Providing Credit:
  2. (a) no Deposits will be accepted from Retail Clients; and/or
  3. (b) a cap on the Credit provided to each Retail Client of USD 10,000.;
  4. 8.3.2 The BBR will apply in a reduced manner, such as lower capital requirements (e.g. USD 5 million[4]);
  5. 8.3.3 Restrictions on holding safeguarded funds for Payment Institutions and Small Payment Institutions pursuant to any requirements under the PSEM Framework for safeguarded sums to be held with an authorised Bank.

Further rules could also not be applied or be applied in a reduced manner if that is required.

8.4 An Authorised Digital Banks (Limited Licence) will come within the definition of Authorised Firms and so be required to comply with other AIFC Acts applicable to Authorised Firms, subject to modifications set out in the DBR.  

8.5 We understand that under the PSEM Policy Paper, certain Authorised Firms do not need separate authorisation under the PSEM Regime, providing they have permission to carry out Regulated Activities such as Accepting Deposits. If an Authorised Digital Bank (Limited Licence) is an Authorised Firm with such permissions, this would ensure that they do not require separate authorisation when acting as payment service providers.


9.Access to Online banking

9.1 Clients want increased flexibility in how they access banking services. This means that they do not want to have to visit a physical branch to receive banking services. Clients want to be able to transfer funds, view their account balance and undertake other account activities wherever they are. In the AIFC, clients will want this regardless of whether they receive remote banking services from an existing Authorised Firm such as a Bank or, in the future, from an Authorised Digital Bank or Authorised Digital Bank (Limited Licence) (i.e. standards and processes around remote access to Regulated Activities should apply to all Authorised Firms).  

9.2 It is important that the Framework is suitably robust and technologically neutral in order for its rules and requirements to apply wherever relevant Regulated Activities are accessed remotely, regardless of what interface is used (e.g., web-page; mobile app; tablet; watch). In the past, some jurisdictions developed a standalone licensing regime for mobile banking. However, leading jurisdictions now rarely have a licensing regime exclusively for mobile banking. This is because they require a technologically neutral licensing regime which is flexible enough to permit banking services to be provided through a variety of interfaces and which therefore does not need to be constantly revised to take account of technological changes. Standards and processes around access and conduct of business are therefore required to ensure that any remote access to banking services is secure and safe for Clients.

9.3 In order to facilitate this, it is likely that certain security standards will need to be implemented in the AIFC in order to allow Clients to access banking services securely. Whilst certain specific security standards should be implemented as rules as discussed in Section 11 below (e.g. SCA (as defined in Section 11)), the AIFC may also wish to develop security guidelines as, for example, the European Banking Authority ("EBA") has done in the EU.[5] 


10.Open banking – API and other Standards

10.1 In order to be able to provide Account Information Services and/or Payment Initiation Services, Authorised Firms, such as Banks, will need to open up their application programming interfaces ("APIs") to share information securely with Authorised Firms providing Account Information Services and/or Payment Initiation Services.

10.2 APIs are codes and protocols which allow different applications to communicate with each other by deciding how different software components should interact. Open data API specifications are available publicly. These allow API providers, such as Banks, to develop API "endpoints" which can be accessed by Authorised Firms providing Account Information Services and/or Payment Initiation Services through building compatible online applications. Open data API specifications are crucial to ensuring the technological neutrality of the Framework, and to allowing the broadest pool of firms to provide Account Information Services and/or Payment Initiation Services.

10.3 The AFSA will need to decide how it wishes to control APIs. For example, in the UK, Open Banking Limited has set out certain API specifications which must be adhered to.[6] This helps ensure the widest possible access through the use of common standards. However, this is less about financial regulation and more about the technical standards and associated boundaries which the AFSA wishes to put in place to foster innovation and encourage new and existing Authorised Firms to provide Account Information Services and/or Payment Initiation Services.

10.4 Furthermore, using the example of the UK's Open Banking Limited, the AFSA may wish to put in place additional guidelines around security, customer experience and operations.[7] However, this is again less about financial regulation and more about the technical standards and associated boundaries which the AFSA may wish to put in place. As these requirements will apply more broadly than just to Authorised Digital Banks, AFSA's powers to issue such guidelines will be set out, if necessary, elsewhere in the AIFC Rules.


11. Security and Consumer Protection

11.1 Where any banking services take place remotely, there are inherent security risks. This is an issue for all Authorised Firms (including Authorised Digital Banks and Authorised Digital Banks (Limited Licence), regardless of whether they come within the definition of Authorised Firms). However, the Framework offers an opportunity to put in place requirements that will increase security and reduce fraud for all Clients.

11.2 One solution to this is to put in place security standards and processes which must be complied with if Clients:

  1. 11.2.1 access Bank Accounts online;
  2. 11.2.2 initiate an electronic payment transaction; or
  3. 11.2.3 carry out any other action through a remote channel which may imply a risk of payment fraud.

This would therefore affect not just the new Regulated Activities of Account Information Services and Payment Initiation Services, but also existing Regulated Activities where these take place remotely (e.g. online or in a mobile app).

11.3 AFSA intends to follow the EU's approach, which is to require Authorised Firms to apply strong customer authentication ("SCA") where a client wishes to take any of the actions in Sections 11.2.1, 11.2.2 or 11.2.3. SCA would also apply to providers of Account Information Services and/or Payment Initiation Services. SCA requires authentication based on two or more independent elements from the following:

  1. 11.3.1 'Knowledge Factor' – something only the Client knows (e.g. password);
  2. 11.3.2 'Possession Factor' – something held only by the Client (e.g. card verification number); and/or
  3. 11.3.3 'Inherence Factor' – something inherent to the Client (e.g. biometric fingerprint, facial recognition or voice recognition).

Given the importance of business-to-business services, the AFSA may wish to introduce specific exemptions for corporate Clients which either disapply SCA for them, or permit them to implement their own equivalent security processes (with equivalence to be determined by the AFSA).

11.4 Where any banking services are accessed online, there are also other factors which will be considered as part of the DBR drafting process, although these will also be applicable to other Authorised Firms carrying out business remotely. By way of example, please see the summary below.

  1. 11.4.1 Client on-boarding – If a Client is on-boarded remotely (e.g. by an Authorised Digital Bank), which documents it would need to provide and how (e.g. PDF copies of invoices as proof of address, passports etc.). Careful consideration needs to be given to Client due diligence that is done remotely. We understand that this will sit within the AIFC's (and/or Kazakhstan's) existing AML/CFT framework. Generally, jurisdictions do not have specific rules for remote Client due diligence. However, there may be some benefit in including some express requirements (e.g. a "selfie" video) where Client due diligence is done remotely.
  2. 11.4.2 Cybersecurity – If Authorised Firms provide Regulated Activities online, what security measures they should put in place for their websites, mobile apps and other interfaces to prevent them succumbing to cyber-attacks and to Client data being stolen.
  3. 11.4.3 Business recovery – As Clients will be relying upon a remote interface (e.g. online platform or mobile app), what back-up measures Authorised Firms must put in place in order to ensure continuity of service (e.g. servers in an alternative location; multiple data stores).
  4. 11.4.4 Outsourcing – To what extent Authorised Firms will be permitted to outsource operational functions, and to the extent that they do, how the AFSA monitors that (e.g. requests to see draft contracts) and the continuing liability of Authorised Firms for outsourced functions. The AFSA may wish to develop guidelines around such outsourcing and what standards need to be adhered to.[8] Whilst we understand that drafting such guidelines are outside the scope of this project, these could be developed by the AFSA to complement the Framework.
  5. 11.4.5 Client terms – If Client terms must contain any specific provisions (e.g. treatment of alleged unauthorised transactions; liability for unauthorised transactions; fees) and whether they would differ between Retail Clients and other Clients. However, this is not specific to banking services taking place remotely.
  6. 11.4.6 Authorised status – Where and how Authorised Firms should set out their authorised status online.
  7. 11.4.7 Consumer protection – Whether Authorised Firms are required to apply any particular security features to Retail Clients or, if security features apply to all Clients, can non-Retail Clients consent to disapply them. Also, whether a higher degree of liability should apply to Authorised Firms when they deal with Retail Clients. These are issues which go beyond just the Framework.
  8. 11.4.8 Data protection – Where Authorised Firms provide Regulated Activities on a remote basis, data protection will clearly be important in a number of ways. For example, access to Clients' records, the sending and receiving of messages/instructions and how Authorised Firms use, store, access, move and ultimately dispose of Client data. The Client should be able to access its own data and move it elsewhere, including cross-border, if it so wishes. We understand that data protection will sit within the AIFC's existing data protection framework.

11.5 The AFSA would need to consider whether to take a prescriptive approach in such areas, or to set out certain areas where Authorised Firms need to provide policies and procedures to address these which satisfy the AFSA. By way of example, the EU has adopted a very prescriptive approach, as demonstrated in the EBA's 'Guidelines on the security measures for operational and security risks of payment services under PSD2'.


[1] We note that some of these activities, in particular providing Money Services and Opening and Operating Bank Accounts, may be amended as part of the introduction of the PSEM Framework and this will be taken into account as part of the drafting process, to ensure the PSEM Framework and DBRs are consistent.

[2]    Namely COB 2 (Client Classification), COB 3 (Communication with Clients and Financial Promotions), COB 4 (Key Information and Client Agreement), COB 7 (Conflicts of Interest), COB 15 (Complaints Handling and Dispute Resolution), COB 16 (Record Keeping and Internal Audit), COB 18 (Banks), Schedule 2 (Key Information and Content of Client Agreement) and Schedule 5 (Financial Promotions).

[3]    Namely MAR 2 (Governance of Reporting Entities), MAR 3 (Financial Reports), MAR 5 (Market Abuse), MAR 6 (Market Disclosure) and Schedule 3 (Corporate Governance Best Practice Standards).

[4]    Under Rule 4.10(a) BBR, the Base Capital Requirement of a Bank is USD 10 million. USD 5 million therefore seems a reasonable Base Capital Requirement for an Authorised Digital Bank (Limited Licence)

[5]https://eba.europa.eu/sites/default/documents/files/documents/10180/2060117/d53bf08f-990b-47ba-b36f-15c985064d47/Final%20report%20on%20EBA%20Guidelines%20on%20the%20security%20measures%20for%20operational%20and%20security%20risks%20under%20PSD2%20(EBA-GL-2017-17).pdf

[6]    https://standards.openbanking.org.uk/api-specifications/

[7]    https://standards.openbanking.org.uk/

[8]    For example, the EBA and the UK FCA have drafted guidelines to complement their regulatory regimes. https://eba.europa.eu/sites/default/documents/files/documents/10180/2551996/38c80601-f5d7-4855-8ba3-702423665479/EBA%20revised%20Guidelines%20on%20outsourcing%20arrangements.pdf?retry=1

https://www.fca.org.uk/publication/finalised-guidance/fg16-5.pdf

Amendments to the AIFC AML Rules (Annex 2)

5. CUSTOMER RISK ASSESSMENT

5.1. Assessing customer AML risks

Conduct of the customer risk assessment

When undertaking a risk-based assessment of a customer under AML 5.1.1 a Relevant Person must:

(a)identify the customer, and any beneficial owner(s) and any person acting on behalf of a customer;

(b)obtain information on the purpose and intended nature of the business relationship;

(c)consider the type of customer, its ownership and control structure, and its beneficial ownership (if any);

(d)consider the nature of the customer's business relationship with the Relevant Person;

(e)consider the customer's country of origin, residence, nationality, place of incorporation or place of business;

(f)consider the relevant product, service or transaction;

(g)consider the beneficiary of a life insurance policy, where applicable; and

(h)consider the outputs of the business risk assessment under Chapter 5.

6. CUSTOMER DUE DILIGENCE

6.1. Undertaking Customer Due Diligence

Undertaking Simplified Due Diligence

A Relevant Person may undertake SDD in accordance with AML 8.1.1 by modifying the CDD under AML 6.3.1 for any customer it has assigned as low risk. Simplified measures should not be conducted whenever there is a suspicion of money laundering and/or terrorist financing.

6.2. Timing of Customer Due Diligence

Establishing a business relationship before Customer Due Diligence is complete

A Relevant Person may establish a business relationship with a customer before completing the verification required by AML 6.3.1 if the following conditions are met:

(a) deferral of the verification of the customer or beneficial owner is necessary in order not to interrupt the normal conduct of a business relationship;

(b) risk management procedures concerning the conditions under which a customer may utilise the business relationship prior to verification have been adopted and are in place; and there is little risk of money laundering occurring and any such risks identified can be effectively managed by the Relevant Person;

(c) in relation to a bank account opening, there are adequate safeguards in place to ensure that the account is not closed and transactions are not carried out by or on behalf of the account holder (including any payment from the account to the account holder) before verification has been completed; and

(d) subject to (c), the relevant verification is completed as soon as reasonably practicable and in any event, no later than 30 days after the establishment of a business relationship.

6.3. Undertaking Customer Due Diligence

Verification of obligations

In undertaking CDD required by AML 6.1.1, a Relevant Person must:

(a) verify the identity of the customer, and of any beneficial owner(s) and any person acting on behalf of a customer, including his authorisation to so act, based on original or properly certified documents, data or information issued by or obtained from a reliable and independent source;

(b) obtain information on the purpose and intended nature of the business relationship;

(c) understand the customer's sources of funds;

(d) understand the customer's sources of wealth; and

(e) undertake on-going due diligence of the customer business relationship under AML 6.4.1.

Customer obligation for life insurance

In complying with AML 6.3.1 for life insurance or other similar policies, a Relevant Person must:

(a) verify the identity of any named beneficiaries of the insurance policy; and

(b) verify the identity of the persons in any class of beneficiary, or where these are not identifiable, ensure that it obtains sufficient information to be able to verify the identity of such persons at the time of pay-out of the insurance policy;.

(c) if a beneficiary of the insurance policy who is a legal person or a legal arrangement presents a higher risk, take enhanced measures which should include reasonable measures to identify and verify the identity of the beneficial owner of the beneficiary, at the time of pay-out; and

(d) take reasonable measures to determine whether the beneficiaries of the insurance policy and/or, where required, the beneficial owner of the beneficiary, are PEPs, at the latest, at the time of the pay-out, and, in cases of higher risks, inform senior management before the pay-out of the policy proceeds, conduct enhanced scrutiny on the whole business relationship with the policyholder, and consider making a suspicious transaction report.

Guidance on identification and verification of beneficial owners

(a) In determining whether an individual meets the definition of a beneficial owner or controller, regard should be had to all the circumstances of the case.

(b) When identifying beneficial owners, a Relevant Person is expected to adopt a substantive (as opposed to form over substance) approach to CDD for legal persons. Adopting a substantive approach means focusing on the money laundering risks of the customer and the product/service and avoiding an approach which focusses purely on the legal form of an arrangement or sets fixed percentages at which beneficial owners are identified (or not).

(c) A Relevant Person should take all reasonable steps to establish and understand a corporate customer's legal ownership and control and to identify the beneficial owner. There are no explicit ownership or control thresholds in defining the beneficial owner because the applicable threshold to adopt will ultimately depend on the risks associated with the customer, and so a Relevant Person must adopt the RBA and pursue on reasonable grounds an approach which is proportionate to the risks identified. A Relevant Person should not set fixed thresholds for identifying the beneficial owner without objective and documented justification. An overly formal approach to defining the beneficial owner may result in a criminal "gaming" the system by always keeping his financial interest below the relevant threshold.

(d) In some circumstances no threshold should be used when identifying beneficial owners because it may be important to identify all underlying beneficial owners to ensure that they are not associated or connected in some way. This may be appropriate where there are a small number of investors in an account or fund, each with a significant financial holding and the customer- specific risks are higher. However, where the customer-specific risks are lower, a threshold can be appropriate. For example, for a low-risk corporate customer which, combined with a lower- risk product or service, a percentage threshold may be appropriate for identifying "control" of the legal person for the purposes of the definition of a beneficial owner.

(e) For a retail investment fund, which is widely-held and where the investors invest via pension contributions, the manager of the fund is not expected to look through to underlying investors where there are none with any material control or ownership levels in the fund. However, for a closely-held fund with a small number of investors, each with a large shareholding or other interest, a Relevant Person should identify and verify each of the beneficial owners, depending on the risks identified as part of its risk-based assessment of the customer.For a corporate health policy with defined benefits, a Relevant Person need not identify the beneficial owners.

(f) Where a Relevant Person carries out identification and verification in respect of actual and potential beneficial owners of a trust, this should include the trustee, settlor, the protector, the enforcer, beneficiaries, other persons with power to appoint or remove a trustee and any person entitled to receive a distribution, whether or not such person is a named beneficiary.

(g) Where no natural person is identified as a beneficial owner, the relevant natural person who holds the position of senior managing official should be identified as such and verified.

6.4. Checking sanctions lists

6.5. Failure to conduct or complete Customer Due Diligence

Prohibitions

Where, in relation to any customer, a Relevant Person is unable to conduct or complete the requisite CDD in accordance with AML 6.3.1 it must, to the extent relevant:

(a) not carry out a transaction with or for the customer through a bank account or in cash;

(b) not open an account or otherwise provide a service;

(c) not otherwise establish a business relationship or carry out a transaction;

(d) terminate or suspend any existing business relationship with the customer;

(e) return any monies or assets received from the customer; and

(f) consider whether the inability to conduct or complete Customer Due Diligence necessitates the making of a Suspicious Activity Report (see Chapter 13).

A Relevant Person is prohibited from knowingly keeping anonymous accounts or accounts in obviously fictitious names.

PART A - INTRODUCTION

Comments to be addressed to:

R.Abdirassilov@aifc.kz


1.Scope and Purpose


1.1 This paper presents a proposed policy to be adopted by the Astana Financial Services Authority (the "AFSA") for the regulation of digital banking services in the Astana International Financial Services Centre (the "AIFC") (the "Framework").

1.2 Terms not defined herein have the meaning given to them in the AIFC Glossary.

1.3 The proposed Framework will aid the economic and social development of Kazakhstan by diversifying who provides banking services, what those banking services are and how Clients[1] use these services.

1.4 This will support the five-year programme for 'Digital Kazakhstan', which is seeking to improve the competitiveness of Kazakhstan’s economy and quality of life through the progressive development of the digital ecosystem. This programme also includes the development of financial technologies, non-cash payments and electronic commerce, as well as progressive regulations that create a vibrant environment to promote greater inclusion and innovation. The AFSA is being supported by and working with the European Bank of Reconstruction and Development (the "EBRD") in implementing aspects of the 'Digital Kazakhstan' programme within the AIFC. The AFSA and the EBRD are engaging consultants, such as Clifford Chance in this case, to assist it with this programme. The proposed Framework is a part of this programme.

1.5 The aim of the proposed Framework is to enhance and build on the existing regulatory framework in order to support the licensing of digital-only banks and to regulate banking services provided remotely (e.g. online; in a mobile app), in support of the introduction of "Open Banking".

1.6 The proposed Framework will provide regulatory certainty to Authorised Firms providing banking services, and to their Clients. It will also promote new and innovative ways for banking services to be provided in the AIFC. 


2. Background


2.1 Digital banking is transforming how banking services are provided around the world. It is expanding the ways that banking services can be offered, which is opening it up to clients that were previously under-served. This means that traditional banking products, such as accepting deposits and providing credit, do not need to be offered through physical branches, but can be provided remotely; for example, online or in a mobile app. Clients can therefore access more banking services in any location.

2.2 In addition, the concept of 'Open Banking' has gained traction over the past few years. This allows a client's banking data to be used not only by his or her own bank, but also by third party providers in order to enable the provision of new products and services which will benefit clients. It establishes a secure way for a wide variety of providers to access a client's banking information and receive improved financial services and other related services.

2.3 Over the past few years, an increasing number of jurisdictions have been putting in place the regulatory infrastructure to enable remote access through digital banking, and to develop 'Open Banking'. Against this background, the AIFC is seeking to put in place the proposed Framework so that Kazakhstan can benefit from these developments and become an attractive location for both local and international providers of such services.


[1]    As per the AFSA Glossary, "Clients" is a broad term including individuals, corporate and government bodies, which can be located within Kazakhstan or externally.

2. GUIDANCE ON KAZAKHSTAN CRIMINAL LAW

2.1. Kazakhstan criminal law

(a)Kazakhstan's criminal legislation, including the Criminal Code, applies to all Centre Participants and therefore Relevant Persons must be aware of their obligations in respect of the criminal law as well as these Rules. Relevant Kazakhstan criminal legislation includes the AML Law and the Criminal Code.

(b)Under Article 218 of the CriminalCode, a Person is criminally liable for the offence of money laundering if they knowingly receive, convert, conceal, possess, or use property representing the proceeds of criminal or administrative infractions of the law of Kazakhstan. The offence may be punished by a custodial sentence, confiscation of assets, and/or a fine.

4. THE RISK BASED APPROACH

4.1. Obligations of the Risk-Based Approach

Obligation to conduct business and customer risk assessment

In order to identify and assess the risks of money laundering and terrorist financing a Relevant Person must conduct a business risk assessment and must also conduct customer risk assessments in accordance with Chapter 5 and keep these assessments up to date.

The risks of money laundering and terrorist financing that may arise in relation to the development of new products and new business practices, including new delivery mechanisms, and the use of new or developing technologies for both new and pre-existing products must be identified and assessed by a Relevant Person prior to the launch or use of such products, practices and technologies.

4.3. Internal policies, controls and procedures

Requirements of policies, controls and procedures

The policies, controls and procedures adopted by a Relevant Person under AML 4.1.1 must be:

(a) proportionate to the nature, scale and complexity of the activities of the Relevant

Person’s business;

(b) comprised of, at minimum, organisation of the development and maintenance of the policies, procedures, systems and controls required by AML 4.1.1, risk management, customer identification, transaction monitoring and studying, employees training and awareness programs;

(c) approved by its senior management; and

(d) monitored, reviewed and updated regularly.

12. SANCTIONS

12.1. Relevant United Nations resolutions and sanctions

Sanctions systems and controls

A Relevant Person must establish and maintain effective systems and controls to ensure that on an on-going basis it is properly informed as to, and takes reasonable measures to comply with, relevant resolutions or sanctions issued by the United Nations Security Council or by the Republic of Kazakhstan. A Relevant Person must freeze without delay and without prior notice, the funds or other assets of designated persons and entities pursuant to relevant resolutions or sanctions issued by the United Nations Security Council or by the Republic of Kazakhstan.

Notification obligation

A Relevant Person must report to the Committee on financial monitoring of the Ministry of Finance of the Republic of Kazakhstan any assets frozen or actions taken in compliance with the prohibition requirements of the relevant resolutions or sanctions issued by the United Nations Security Council or by the Republic of Kazakhstan, including attempted transactions.

A Relevant Person must immediately notify the AFSA when it becomes aware that it is:

(a) carrying on or about to carry on an activity;

(b) holding or about to hold money or other assets; or

(c) undertaking or about to undertake any other business whether or not arising from or in connection with (a) or (b),

for or on behalf of a person, where such carrying on, holding or undertaking constitutes or may constitute a contravention of a relevant sanction or resolution issued by the United Nations Security Council.

13. MONEY LAUNDERING REPORTING OFFICER, SUSPICIOUS TRANSACTIONS AND TIPPING OFF

13.7. Reporting

A Relevant Person must complete the AFSA's AML Return form on an annual basis and submit such form to the AFSA within four 4 months of its financial year end.

Threshold Transactions Controls

A Relevant Person must establish and maintain procedures, systems and controls to monitor, detect and report transactions above defined thresholds in accordance with the AML Law.

Suspicious Activity Controls

A Relevant Person must establish and maintain policies, procedures, systems and controls to monitor and detect suspicious activity or transactions in relation to potential money laundering or terrorist financing.

Immunity from liability for disclosure of information relating to money laundering transactions

The disclosure by a Relevant Person to the competent authorities of information relating to money laundering/terrorist financing is not a breach of the obligation of secrecy or non- disclosure or (where applicable) of any enactment by which that obligation is imposed.

Employee reporting to MLRO

A Relevant Person must have policies, procedures, systems and controls to ensure that whenever any employee, acting in the ordinary course of his employment, either:

(a) knows;

(b) suspects; or

(c) has reasonable grounds for knowing or suspecting,

that a person is engaged in or attempting money laundering or terrorist financing, that employee promptly notifies the Relevant Person’s MLRO and provides the MLRO with all relevant information within the employee's knowledge.

14. GENERAL OBLIGATIONS

14.1. Training and Awareness

Training and Other Obligations

A Relevant Person must implement screening procedures to ensure high standards when hiring employees.

A Relevant Person must take appropriate measures to ensure that its employees:

(a) are made aware of the law relating to money laundering and terrorist financing;

(b) are regularly given training in how to recognise and deal with transactions and other activities which may be related to money laundering or terrorist financing;

(c) understand its policies, procedures, systems and controls related to money laundering and any changes to these;

(d) understand the types of activity that may constitute suspicious activity in the context of the business in which an employee is engaged and that may warrant a notification to the MLRO under AML 13.7.3;

(e) understand its arrangements regarding the making of a notification to the MLRO under AML 13.7.3;

(a) are aware of the prevailing techniques, methods and trends in money laundering relevant to the business of the Relevant Person;

(b) understand the risk of tipping-off and how to avoid informing a customer or potential customer that it is or may be the subject of a SAR;

(c) understand the roles and responsibilities of employees in combating money laundering, including the identity and responsibility of the Relevant Person’s MLRO and deputy, where applicable; and

(d) understand the relevant findings, recommendations, guidance, directives, resolutions, sanctions, notices or other conclusions described in Chapter 13.

Appropriate measures

In determining what measures are appropriate under AML 14.1.1 Relevant Person must take account of:

(a) the nature of its business;

(b) its size; and

(c) the nature and extent of the risks of money laundering and terrorist financing to which its business is subject.

The AFSA may impose additional training requirements in respect of all, or certain, relevant employees of a Relevant Person.

Amendments to the AIFC GEN Rules (Annex 2)

AIFC General Rules (GEN)

In this document, a blue font and underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Schedule 1: Regulated Activates

22. Developing Financial Technology Activities

(1) An activity specified in paragraph 2.3.1(c) of the AIFC FinTech Rules.

23. Testing Financial Technology Activities

(1) Financial activities which are similar to those that are already being regulated in the AIFC, where (i) a different technology is being applied; or

(ii) the same technology is being applied differently;

(2) Financial activities not regulated in the AIFC; or

(3) Activities likely to be regulated in the AIFC as a financial or an ancillary service.

*Annex 2_CAG

Chapter 5 Credit Risk

A. Introduction

1. Credit risk is:

(a) the risk of default by counterparties; and

(b) the risk that an asset will lose value because its credit quality has deteriorated.

2. Credit risk may result from on-balance-sheet and off-balance-sheet exposures, including loans and advances, investments, inter-bank lending, derivative transactions, securities financing transactions and trading activities. It can exist in a Bank’s trading book or banking book.

B. Credit Risk - Management Framework & Governance

1. This section of the CAG sets out the standards, guidance and norms required to comply with the rules in respect of the Credit Risk management framework and governance, as specified in Chapter 5 of BBR. These elements convey the supervisory expectations of the AFSA on Credit risk management framework and its governance. Compliance with the standards and guidance detailed in this section of CAG, both in letter and in spirit, is required to demonstrate fulfillment of the regulatory obligations specified in Chapter 5 of BBR. The AFSA will use these standards, norms and key elements specified here to assess compliance with BBR Rules on Credit Risk management.

2. In order to comply with the requirements specified in BBR Rule 5.1, and considering the nature, scale and complexity of a Bank’s credit risk, and how often it provides credit or

incurs credit risk, a Bank’s credit risk management policy is expected to include:

(a) how the Bank defines and measures credit risk;

(b) the Bank’s business aims in incurring credit risk, including:

(i) identifying the types and sources of credit risk that the Bank will permit itself to be exposed to (and the limits on that exposure) and those that it will not;

(ii) setting out the degree of diversification that the Bank requires, the Bank’s tolerance for risk concentrations and the limits on exposures and concentrations; and

(iii) stating the risk-return trade-off that the Bank is seeking to achieve;

(c) the kinds of credit to be offered, and ceilings, pricing, profitability, maximum maturities and ratios for each kind of credit;

(d) a ceiling for the total credit portfolio (in terms, for example, of loan-to- deposit ratio,

undrawn commitment ratio, a maximum amount or a percentage of the Bank’s capital);

(e) portfolio limits for maximum gross exposures by region or country, by industry or sector, by category of counterparty (such as banks, non-bank financial entities and corporate counterparties), by product, by counterparty and by connected counterparties;

(f) limits, terms and conditions, approval and review procedures and records kept for lending to connected counterparties;

(g) types of collateral, loan-to-value ratios and criteria for accepting guarantees;

(h) the detailed limits for credit risk, and a credit risk structure, that:

(i) takes into account all significant risk factors, including intra- group exposures;

(ii) is commensurate with the scale and complexity of the Bank’s activities; and

(iii) is consistent with the Bank’s business aims, historical performance, and the

amount of capital it is willing to risk;

(i) procedures for

(i) approving new products and activities that give rise to credit risk;

(ii) regular risk position and performance reporting; and

(iii) approving and reporting exceptions to limits

(j) allocating responsibilities for implementing the credit risk management policy and monitoring adherence to, and the effectiveness of, the policy; and

(k) the required information systems, staff and other resources.

3. Problem assets include impaired credits wherein the debt servicing payments are already overdue for a significant amount of time and also include assets, where there is material uncertainty about the collectability of the payments due in full or in part.

Credit Decisions

4. BBR Rule 5.1 (5) does not prevent arrangements such as an employee loan scheme, so long as the policy ensures that the scheme’s terms, conditions and limits are generally available to employees and adequately address the risks and conflicts that arise from loans under it.

5. The credit risk management policy of a Bank should clearly set out who has the authority to approve loans to employees. The authority of a credit committee or credit officer should be appropriate for the products or portfolio and should be commensurate with the committee’s or officer’s credit experience and expertise. Each authority to approve should be reviewed regularly to ensure that it remains appropriate for current market conditions and the committee’s or officer’s performance.

6. A Bank’s remuneration policy should be consistent with its credit risk management policy and should not encourage officers to attempt to generate short-term profits by taking an unacceptably high level of risk.

7. The policy must state that decisions relating to the following are made at the appropriate

level of the Bank’s senior management or governing body:

(a) exposures exceeding a stated amount or percentage of the Bank’s capital;

(b) exposures that, in accordance with criteria set out in the policy, are especially risky;

(c) exposures that are outside the Bank’s core business.

8. The level at which credit decisions are made should vary depending on the kind and amount of credit and the nature, scale and complexity of the Bank’s business. For some Banks, a credit committee with formal terms of reference might be appropriate; for othrs, individuals with pre-assigned limits would do.

9. A Bank should ensure, through periodic independent audits, that the credit approval function is properly managed and that credit exposures comply with prudential standards and internal limits. The results of audits should be reported directly to the governing body, credit committee or senior management, as appropriate.

C. Credit Risk management

Credit Risk Assessment

1. A Bank must establish and implement appropriate policies to enable it to assess credit risk when the credit is granted or the risk is incurred and afterwards. In particular, the policies must enable the Bank:

(a) to measure credit risk (including the credit risk of off-balance- sheet items, such as derivatives, in credit equivalent terms);

(b) to effectively use its internal credit risk assessment;

(c) to rate and risk-weight a counterparty;

(d) to monitor the condition of individual credits;

(e) to administer its credit portfolio, including keeping the credit files current, getting up-to- date financial information on counterparties, and the electronic storage of important documents;

(f) to ensure that the value of collateral and the value of the other CRM techniques used by the Bank are assessed regularly;

(g) to assess whether its CRM techniques are effective; and

(h) to calculate its credit risk capital requirement.

2. A Bank involved in loan syndications or consortia should not rely on other parties’ assessments of the credit risk involved but should carry out a full assessment based on its own credit risk management policy.

3. The AFSA expects that an Bank’s Credit Risk strategy will set out the approach that the Bank will take to Credit Risk management, including various quantitative and qualitative targets. It should be communicated to all relevant functions and staff within the organisation and be set out in the Bank's Credit Risk policy.

4. The AFSA expects that an Bank’s Credit Risk management policy and strategy for

managing Credit Risk will take into account the need to:

(a) develop a Credit management strategy, policies and processes in accordance with the

Bank’s stated Credit Risk tolerance;

(b) ensure that the Bank maintains sufficient capital to support its credit risk exposure at all times;

(c) determine the structure, responsibilities and controls for managing Credit Risk and for overseeing the credit portfolio of all branches and subsidiaries in the jurisdictions in which the Bank is active, and outline these elements clearly in the Bank’s credit risk management policy;

(d) have in place adequate internal controls to ensure the integrity of its Credit Risk management processes;

(e) ensure that stress testing of the credit risk portfolio is effective and appropriate for the Bank;

(f) establish a set of reporting criteria, specifying the scope, manner and frequency of reporting to various recipients (such as the Governing Body, senior management and the asset/liability committee) and who is responsible for preparing the reports

(g) establish the specific procedures and approvals necessary for exceptions to policies and limits, including the escalation procedures and follow-up actions to be taken for breaches of limits;

(h) monitor closely current trends and potential market developments that may present significant, unprecedented and complex challenges for managing Credit Risk so that appropriate and prompt changes to the Credit management strategy can be made as needed; and

(i) continuously review information on the Bank’s Credit developments and report

regularly to the Governing Body

5. In respect of managing the Bank’s Credit Risk, senior management are expected to:

(a) oversee the development, establishment and maintenance of procedures and practices that translate the goals, objectives and risk tolerances approved by the governing body into operating standards that are consistent with the governing body's intent and which are understood by the relevant members of an Bank's staff;

(b) adhere to the lines of authority and responsibility that the governing body has established for managing Credit Risk;

(c) oversee the establishment and maintenance of management information and other systems that identify, assess, control and monitor the Bank's Credit Risk; and

(d) oversee the establishment of effective internal controls over the Credit Risk management process.

D. Problem Assets & Impaired Assets

Impaired credits

1. Impaired credit means a credit that is categorised as substandard, doubtful or loss. For the purpose of applying risk-weights, interest is suspended on an impaired credit. A credit is a restructured credit if it has been re-aged, extended, deferred, renewed, rewritten or placed in a workout program.

2. The Credit Risk management system and, in particular, the systems, policies and processes aimed at classification of credits, monitoring and identification of problem credits, management of problem credits and provisioning for them must include all the on- balance sheet and off-balance sheet credit Exposures of the Bank.

3. The review of impaired credits and other problem assets may be done individually, or by class, but must be done at least once a month. A large exposure that is an impaired credit must be managed individually in terms of its valuation, categorisation and provisioning.

4. Unless there is good reason to do so, a restructured credit can never be classified as performing. A restructured credit may be reclassified to a more favourable category, but only by one level of rating up from its category before the restructure. The credit may be reclassified one further category up after 180 days of satisfactory performance under the terms of the new contract.

E. Calculation of Credit Risk Capital Requirement

Using external credit rating agencies (ECRAs)

1. This section provides additional information and guidance in respect of BBR Rule 5.5.

2. A rating is a solicited rating if the rating was initiated and paid for by the issuer of the instrument, the rated counterparty or any other entity in the same corporate group as the issuer or rated counterparty.

3. A Bank that chooses to use ratings determined by an ECRA for exposures belonging to a class must consistently use those ratings for all the exposures belonging to that class. The Bank must not selectively pick between ECRAs or ratings in determining risk- weights.

4. A Bank may use an unsolicited rating, only if it receives AFSA’s written approval to do so or in accordance with a direction from the AFSA. The AFSA may give a written direction setting out conditions that must be satisfied before a Bank may use an unsolicited rating.

5. The Bank must ensure that the relevant rating takes into account the total amount of the exposure (that is, the principal and any interest due).

Calculation of Risk-Weighted Assets (RWAs)

6. In order to comply with the rules in BBR 5.6 in respect of calculation of Credit Risk-Weighted Assets and to meet the expectations of the AFSA in this regard, a Bank is expected to consider and employ the guidance, interpretations and additional information provided in this section of the CAG.

7. Risk-weights used in the calculation of RWAs as defined in BBR Rule 5.6, are based on credit ratings or fixed risk-weights and are broadly aligned with the likelihood of counterparty default. A Bank may use the ratings determined by an ECRA if allowed to do so by these rules and subject to the provisions of BBR 5.5.

8. In respect of table 5B, investment property is land, a building or part of a building (or any combination of land and building) held to earn rentals or for capital appreciation or both. Investment property does not include property held for use in the production or supply of goods or services, for administrative purposes, or for sale in the ordinary course of business. A real estate asset owned by a Bank as a result of a counterparty default is treated as ‘other item’ and risk-weighted at 100% but only for a period of 3 years starting from the date when the Bank records the asset on its books.

9. In respect of table 5B, the list of multilateral development banks (Item 4 in Column 1) which qualify for a 0% risk weight, are published by the Basel Committee for Banking Supervision (BCBS). The list was originally included in the document Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework—Comprehensive

Version¸ published by the BCBS on 30 June 2006, and has since been updated by BCBS

newsletters.

10. As at November 2016 the list is as follows:

• the African Development Bank

• the Asian Development Bank

• the Caribbean Development Bank

• the Council of Europe Development Bank

• the European Bank for Reconstruction and Development

• the European Investment Bank

• the European Investment Fund

• the Inter-American Development Bank

• the International Development Association

• the International Finance Facility for Immunization

• the Islamic Development Bank

• the Nordic Investment Bank

• the World Bank Group (comprising the International Bank for Reconstruction and Development, the International Finance Corporation and the Multilateral Investment Guarantee Agency).

Examples of MDBs that do not qualify for 0% risk weight are:

• the Arab Bank for Economic Development in Africa

• the Asian Infrastructure Investment Bank

• the Black Sea Trade and Development Bank

• the Development Bank of Latin America

• the Central American Bank for Economic Integration

• the Development Bank of Central African States

• the East African Development Bank

• the Economic Cooperation Organization Trade and Development Bank

• the Eurasian Development Bank

• the International Finance Facility for Immunisation

• the International Fund for Agricultural Development

• the International Investment Bank

• the New Development Bank

• the OPEC Fund for International Development

• the West African Development Bank.

11. For the purposes of BBR Rule 5.8, specialised lending is a lending transaction that complies with the following requirements:

(a) the purpose of the loan is to acquire an asset;

(b) the cash flow generated by the collateral is the loan’s exclusive (or almost exclusive) source of repayment;

(c) the loan represents a significant liability in the borrower’s capital structure;

(d) the credit risk is determined primarily by the variability of the cash flow generated by the collateral (rather than the independent capacity of a broader commercial enterprise).

12. Specialised lending is associated with the financing of projects where the repayment depends on the performance of the underlying collateral. There are 5 sub-classes of specialised lending:

(a) project finance—financing industrial projects based on the projected cash flows of the project;

(b) object finance—financing physical assets based on the projected cash flows obtained primarily through the rental or lease of the assets;

(c) commodities finance—financing the reserves, receivables or inventories of exchange- traded commodities where the exposure is paid back based on the sale of the commodity (rather than by the borrower from independent funds);

(d) income-producing real estate finance—financing real estate that is usually rented or leased out by the debtor to generate cash flow to repay the exposure; and

(e) high-volatility commercial real estate finance—financing commercial real estate which demonstrates a much higher volatility of loss rates compared to other forms of specialised lending.

13. For the purposes of BBR Rule 5.9, eligible residential mortgage means a mortgage on a residential property that is, or will be:

(a) occupied by the counterparty for residential use; or

(b) rented out (on a non-commercial basis) for residential use.

14. For the purposes of BBR Rule 5.11:

(a) Current credit exposure is the absolute mark-to-market value (or replacement cost) of the item.

(b) Potential future credit exposure (also known as ‘the add-on’) is the amount calculated by multiplying the notional principal amount of the item by the relevant credit conversion factor in table 5D. The notional principal amount is the reference amount used to calculate payment streams between counterparties to the item.

Table E1: Credit conversion factors for market-related off-balance-sheet items

Column 1 item

Column 2

description of claim or asset

Column 3 credit

conversion

1

interest rate contracts



(a)       residual maturity 1 year or less

0


(b)      residual maturity > 1 year to 5 years

0.5


(c)       residual maturity > 5years

1.5

2

foreign exchange and gold contracts



(a)       residual maturity 1 year or less

1


(b)      residual maturity > 1 year to 5 years

5


(c)       residual maturity > 5years

7.5

3

equity contracts



(a)       residual maturity 1 year or less

6


(b)      residual maturity > 1 year to 5 years

8


(c)       residual maturity > 5years

10

4

precious metal contracts (other than gold)



(a)       residual maturity 1 year or less

7


(b)      residual maturity > 1 year to 5 years

7


(c)       residual maturity > 5years

8

5

other commodity contracts (other than precious metals)



(a)       residual maturity 1 year or less

10


(b)      residual maturity > 1 year to 5 years

12


(c)       residual maturity > 5years

15

6

other market-related contracts



(a)       residual maturity 1 year or less

10


(b)      residual maturity > 1 year to 5 years

12


(c)       residual maturity > 5years

15

(c) Potential future credit exposure must be based on an effective, rather than an apparent, notional principal amount. If the stated notional principal amount of an item is leveraged or enhanced by the structure of the item, the Bank must use the effective notional principal amount in calculating the potential future credit exposure. No potential future credit exposure is calculated for a single-currency floating/floating interest rate swap. The credit exposure from such an interest rate swap must be based on mark-to-market values.

15. For the purposes of BBR Rule 5.13:

(a) The credit conversion factors for a protection buyer in a single-name credit default swap or single-name total-rate-of-return swap are set out in column 3 of table E2. The credit conversion factors for a protection seller are set out in column 4 of that table.

(b) The protection seller in a single-name credit default swap or single- name total-rate- of-return swap is subject to the add-on factor for a closed-out single-name swap only if the protection buyer becomes insolvent while the underlying asset is still solvent. The add-on must not be more than the amount of unpaid premiums.

(c) In the table E2, qualifying reference obligation includes obligations arising from items relating to:

(i) securities that are rated investment grade by at least 2 ECRAs; or

(ii) securities that are unrated (or rated investment grade by only 1 ECRA), but:

(1) are approved by the AFSA, on application by the Bank, to be of comparable investment quality; and

(2) are issued by an issuer that has its equity included in a main index used in a recognised exchange.

Table E2 Credit conversion factors for single-name swaps

Column 1 Item

Column 2 type of swap

Column 3 Protection Buyer (%)

Column 4 Protection Seller (%)

1

credit default swap with qualifying reference

obligation

5

5

2

credit default swap with non-qualifying reference

obligation

10

10

3

total-rate-of-return swap with qualifying reference obligation

5

5

4

total-rate-of-return swap with non-qualifying reference obligation

10

10

16. For the purposes of complying with BBR Rule 5.15, the credit equivalent amount of non- market related items is calculated by the following procedures:

(a) Unless the item is a default fund guarantee in relation to clearing through a central counterparty, the credit equivalent amount of a non-market-related off-balance- sheet item is calculated by multiplying the contracted amount of the item by the relevant credit conversion factor in table E3.

(b) If the Bank arranges a repurchase or reverse repurchase or a securities lending or borrowing transaction between a customer and a third party and provides a guarantee to the customer that the third party will perform its obligations, the Bank must calculate the credit risk capital requirement as if it were the principal.

Table E3 Credit conversion factors for non-market-related off-balance-sheet items

Column 1 Item

Column 2 Type of item

Column 3 Credit conversion

1

direct credit substitutes

100

2

performance-related contingencies

50

3

trade-related contingencies

20

4

lending of securities, or lodging securities as

100

5

assets sold with recourse

100

6

forward asset purchases

100

7

partly paid shares and securities

100

8

placements of forward deposits

100

9

note issuance and underwriting facilities

50

10

commitments with certain drawdown

100

11

commitments with uncertain drawdowns (for example, undrawn formal standby facilities and credit lines) with an original maturity of 1 year or less

20

12

commitments with uncertain drawdowns with an original maturity of more than 1 year

50

13

commitments that can be unconditionally cancelled at any time without notice (for example, undrawn overdraft and credit card facilities for which any

outstanding unused balance is subject to review at

0

(c) For item 4 of table E3, an exposure from lending securities, or lodging securities as collateral, may be treated as a collateralised transaction.

17. An illustration of the operation of BBR rule 5.17 is as follows: An irrevocable commitment with an original maturity of 6 months with an associated facility that has a nine-month term is taken to have an original maturity of 15 months.

F. Credit Risk Mitigation (CRM)

1. A Bank is able to obtain capital relief by using Credit Risk Mitigation (CRM) techniques. CRM techniques must be viewed as complementary to, rather than a replacement for, thorough credit risk assessment.

2. According to BBR rule 5.6 (2), if a claim or asset to which a risk-weight must be applied is secured by eligible financial collateral or guarantee (or there is a mortgage indemnity insurance, or a credit derivative instrument or netting agreement) this Part on credit risk mitigation may be used to reduce the credit risk capital requirement of the Bank.

3. Available CRM techniques include:

(a) accepting collateral, standby letters of credit and guarantees;

(b) using credit derivatives or other derivative instruments;

(c) using netting agreements; and

(d) purchasing insurance.

4. CRM using collateral and guarantees is usually dealt with at the time credit is granted. In contrast, credit derivatives and netting agreements are often used after the credit is granted or used to manage the Bank’s overall portfolio risk.

5. A Bank should not rely excessively on collateral or guarantees to mitigate credit risk. While collateral or guarantees may provide secondary protection to the Bank if the counterparty defaults, the primary consideration for credit approval should be the counterparty’s

repayment ability.

6. In choosing a CRM technique, the Bank must consider:

(a) the Bank’s knowledge of, and experience in using, the technique;

(b) the cost-effectiveness of the technique;

(c) the type and financial strength of the counterparties or issuers;

(d) the correlation of the technique with the underlying credits;

(e) the availability, liquidity and realisability of the technique;

(f) the extent to which documents in common use (for example, the ISDA Master Agreement) can be adopted; and

(g) the degree of recognition of the technique by financial services regulators.

7. In respect of employing a CRM technique:

(a) a Bank accepting eligible financial collateral for CRM, must ensure that such collateral can be enforced and any necessary legal procedures have been followed.

(b) A Bank should consider whether independent legal opinion should be sought on the enforceability of documents. The documents should be ready before the Bank enters into a contractual obligation or releases funds.

8. If a CRM technique (other than a guarantee) and the exposure covered by it are denominated in different currencies (that is, there is a currency mismatch between them), the haircut that applies is:

(a) if the mismatched currencies are both pegged to the same reference currency, or 1 of them is pegged to the other—0; or

(b) in any other case—8%.

9. If there is a currency mismatch between a guarantee and the exposure covered by it, the amount of the exposure that is covered must be reduced using the following formula:


where:

G is the nominal amount of the guarantee.

Hfx is the haircut appropriate for the currency mismatch between the credit protection and the underlying obligation, as follows:

(a) if the guarantee is revalued every 10 business days—8%;

(b) if the guarantee is revalued at any longer interval—the factor H calculated using the formula in sub-rule (5); or

(c) if the mismatched currencies are both pegged to the same reference currency, or if 1 of them is pegged to the other—0.

10. If the guarantee is revalued at intervals longer than 10 business days, the 8% haircut must

be scaled up using the following formula:

where:


H is the scaled-up haircut.

N is the number of business days between the revaluations.

11. In respect of cash collateral, the recourse may be in the form of a contractual right of set- off on credit balances. A common-law right of set-off is, on its own, insufficient to satisfy this rule.

12. While using collateral as a CRM technique, the Bank should have clear and robust procedures for the liquidation of collateral to ensure that the legal conditions for declaring default and liquidating the collateral are observed. The Bank should also consider whether, in the event of default, notice to the party that lodged the collateral would be needed before the Bank could have recourse to it.

13. In respect of using collateral as a CRM technique, under BBR rule 5.17, Collateral accepted by a Bank must be valued at its net realisable value, taking into account prevailing market conditions. That value must be monitored at appropriate intervals, and the collateral must be regularly revalued.

14. The net realisable value of some collateral may be readily available (for example, collateral that is marked-to-market regularly). Other collateral may be more difficult to value and may require knowledge and consideration of prevailing market conditions. The method and frequency of monitoring and revaluation depend on the nature and condition of the collateral. For example, securities accepted as collateral are usually marked to market daily.

G. Use of Netting Agreements for Credit Risk Mitigation (CRM)

1. In respect of using a netting agreement to obtain capital relief under BBR rule 5.20, a Bank must follow the guidance and criteria specified in the following paragraphs of this section.

2. The following kinds of transactions may be netted:

(a) on-balance-sheet loans and deposits, but only if:

(i) the Bank is able to determine at all times the assets and liabilities that are subject to netting under the agreement; and

(ii) the deposits satisfy the criteria for eligible financial collateral;

(b) securities financing transactions;

(c) over the counter derivative transactions.

3. Securities financing transactions are not included as part of market related transactions. A netting agreement may include the netting of over the counter derivative transactions:

(a) across both the banking and trading books of a Bank (if the netted transactions satisfy the criteria in this section); and

(b) across different market-related products to the extent that they are recognised as market-related transactions.

Criteria for eligible netting agreements

4. To be an eligible netting agreement, a netting agreement:

(a) must be in writing;

(b) must create a single obligation covering all transactions and collateral included in the agreement and giving the Bank the following rights:

(i) the right to terminate and close-out, in a timely way, all the transactions included in the netting agreement;

(ii) the right to net the gains and losses on those transactions (including the value of any collateral) so that the Bank either has a claim to receive, or an obligation to pay, only the net sum of the close-out values of the individual transactions;

(iii) the right to liquidate or set-off collateral if either party to the agreement fails to meet its obligations because of default, liquidation, bankruptcy or other similar circumstances;

(c) must not be subject to a walkaway clause; and

(d) must be supported by a written and reasoned legal opinion that complies with noms and criteria in this section.

(e) For forward contracts, swaps, options and similar derivative transactions, the right to net gains and losses will include the positive and negative mark-to-market values of the individual transactions.

5. A Bank must not recognise a netting agreement as an eligible netting agreement if it becomes aware that a financial services regulator of the counterparty is not satisfied that the agreement is enforceable under the laws of the regulator’s jurisdiction. This rule applies regardless of any legal opinion obtained by the Bank. A netting agreement is not an eligible netting agreement if there is doubt about its enforceability.

6. A Bank must ensure that a netted transaction is covered by an appropriate legal opinion. In calculating the net sum due to or from a counterparty, the Bank must exclude netted transactions for which it has not obtained a satisfactory legal opinion applicable in the relevant jurisdiction. An excluded transaction must be reported on a gross basis.

7. For an eligible netting agreement which meets the requirements specified in paragraph 4 of this section, the legal opinion must conclude that, in the event of default, liquidation, bankruptcy or other similar circumstances of a party to the netting agreement, the Bank’s claims and obligations are limited to the net sum calculated under the netting agreement in accordance with the applicable law.

8. The AFSA expects the legal opinion to deal with the issue of which of the following laws applies to the netting:

(a) the law of the jurisdiction in which the counterparty is incorporated or formed (or, in the case of an individual, resides)

(b) if an overseas branch of the counterparty is involved—the law of the jurisdiction in which the branch is located

(c) the law that governs the individual transactions

(d) the law that governs any contract or agreement necessary to give effect to the netting.

9. In particular, the legal opinion must conclude that, in the event of insolvency or external administration of a counterparty, a liquidator or administrator of the counterparty will not be able to claim a gross amount from the bank while only being liable to pay a dividend in insolvency to the Bank (as separate money flows).

10. In some countries, there are provisions for the authorities to appoint an administrator to a troubled bank. Under statutory provisions applying in those countries, the appointment of an administrator might not constitute a ground for triggering a netting agreement. Such provisions do not prevent the recognition of an affected netting agreement if the agreement can still take effect if the bank under administration does not meet its obligations as they fall due.

Requirements—legal opinion

11. Before a Bank uses a legal opinion to support a netting agreement, the Bank:

(a) must ensure that the opinion is not subject to assumptions or qualifications that are unduly restrictive;

(b) must review the assumptions about the enforceability of the agreement and must ensure that they are specific, factual and adequately explained in the opinion; and

(c) must review and assess the assumptions, qualifications and omissions in the opinion to determine whether they give rise to any doubt about the enforceability of the agreement.

12. The Bank must have procedures to monitor legal developments and to ensure that its netting agreements continue to be enforceable. The Bank must update the legal opinions about the agreements, as necessary, to ensure that the agreements continue to be eligible.

13. The Bank may rely on a legal opinion obtained on a group basis by another member of the Financial Group of which it is a member if the Bank and the other member have satisfied themselves that the opinion covers a netting agreement to which the Bank is a counterparty. The Bank must report a transaction on a gross basis if there is any doubt about, or any subsequent legal development affects, the enforceability of the agreement.

14. A Bank may rely on a general legal opinion about the enforceability of netting agreements in a particular jurisdiction if the Bank is satisfied that the type of netting agreement is covered by the opinion. The Bank must satisfy itself that the netting agreement with a counterparty and the general legal opinion are applicable to each transaction and product type undertaken with the counterparty, and in all jurisdictions where those transactions are originated.

Netting of positions across books

15. A Bank may net positions across its banking and trading books only if:

(a) the netted transactions are marked-to-market daily; and

(b) any collateral used in the transactions satisfies the criteria for eligible financial collateral in the banking book.

Monitoring and reporting of netting agreements

16. If directed by the AFSA, a Bank must demonstrate that its netting policy is consistently implemented, and that its netting agreements continue to be enforceable. The Bank must keep adequate records to support its use of netting agreements and to be able to report netted transactions on both gross and net bases. The Bank must monitor its netting agreements and must report and manage:

(a) roll-off risks;

(b) exposures on a net basis; and

(c) termination risks;

for all the transactions included in a netting agreement.

Collateral and guarantees in netting

17. A Bank may take collateral and guarantees into account in calculating the risk-weight to be applied to the net sum under a netting agreement. The Bank may assign a risk-weight based on collateral or a guarantee only if:

(a) the collateral or guarantee has been accepted or is otherwise subject to an enforceable agreement; and

(b) the collateral or guarantee is available for all the individual transactions that make up the net sum of exposures calculated.

18. The Bank must ensure that provisions for applying collateral or guarantees to netted exposures under a netting agreement comply with the requirements for eligible financial collateral and guarantees in these rules.

H. Securitisation and Re-securitisation

1. In respect of obtaining capital relief under BBR rule 5.21 for securitisation and re- securitisation arrangements, a Bank must follow the guidance and criteria specified in the following paragraphs of this section.

2. A Bank’s securitisation exposures may arise from the Bank being (or acting in the capacity of) party to a securitisation. Securitisation, in relation to a Bank, is the process of pooling various kinds of contractual debt or non-debt assets that generate receivables and selling their related cash flows to third party investors as securities. In a securitisation, payments to the investors depend on the performance of the underlying pool of assets, rather than on an obligation of the originator of the assets.

3. The underlying pool in a securitisation may include 1 or more exposures. The securities usually take the form of bonds, notes, pass-through securities, collateralised debt obligations or even equity securities that are structured into different classes (tranches) with different payment priorities, degrees of credit risk and return characteristics.

4. A securitisation (whether traditional or synthetic) must have at least 2 tranches. Re- securitisation is a securitisation in which at least one of the underlying assets is itself a securitisation or another re-securitisation. Exposures arising from re-tranching are not re- securitisation exposures if, after the re-tranching, the exposures act like direct tranching of a pool with no securitised assets. This means that the cash flows to and from the Bank as originator could be replicated in all circumstances and conditions by an exposure to the securitisation of a pool of assets that contains no securitisation exposures.

5. A reference in this Part to securitisation includes re-securitisation.

Securitisation structures

6. A securitisation may be a traditional securitisation or a synthetic securitisation.

7. In a traditional securitisation, title to the underlying assets is transferred to an SPE, and the cash flows from the underlying pool of assets are used to service at least 2 tranches. A traditional securitisation generally assumes the movement of assets off the originator’s balance- sheet.

8. A synthetic securitisation is a securitisation with at least 2 tranches that reflect different degrees of credit risk where the credit risk of the underlying pool of exposures is transferred, in whole or in part, through the use of credit derivatives or guarantees. In a synthetic securitisation, the third party to whom the risk is transferred need not be an SPE.

9. The AFSA would treat as securitisations other structures designed to finance assets that are legally transferred to a scheme by packaging them into tradeable securities secured on the assets and serviced from their related cash flows. Funded credit derivatives would include credit-linked notes, and unfunded credit derivatives would include credit default swaps.

Securitisation exposures

10. A securitisation exposure of a Bank is a risk position (whether on-balance-sheet or off- balance-sheet) held by the Bank arising from a securitisation. A few examples of sources are

(a) investments in a securitisation

(b) asset-backed securities (including mortgage-backed securities)

(c) credit enhancements and liquidity facilities

(d) interest rate swaps and currency swaps

(e) credit derivatives

(f) corporate bonds, equity securities and private equity investments

(g) reserve accounts (such as cash collateral accounts) recorded as assets by a Bank that is, or that acts in the capacity of, an originator.

Parties to securitisation

11. For purposes of calculating a Bank’s capital requirement, the parties to a securitisation are the originator, the issuer and the investors. Depending on the securitisation structure, a Bank may be (or act in the capacity of) originator, issuer, investor or any 1 or more of the following:

(a) a manager of the securitisation;

(b) a sponsor of the securitisation;

(c) an adviser to the securitisation;

(d) an entity to place the securities with investors;

(e) a provider of credit enhancement;

(f) a provider of a liquidity facility;

(g) a servicer to carry out certain activities usually carried out by the manager of the securitisation in relation to the underlying assets.

12. A Bank may act as sponsor of a securitisation or similar programme involving assets of a customer. As sponsor, the Bank earns fees to manage or advise on the programme, place the securities with investors, provide credit enhancement or provide a liquidity facility

13. A Bank is an originator of a securitisation if:

(a) the Bank originates, directly or indirectly, underlying assets included in the securitisation; or

(b) the Bank serves as sponsor of an asset-backed commercial paper programme (or similar programme) that acquires exposures from third parties.

14. In relation to a programme that acquires exposures from third parties, a Bank would generally be considered a sponsor (and, therefore, an originator) if the Bank, in fact or in substance, manages or advises the programme, places securities into the market, provides a liquidity facility or provides a credit enhancement. Acts of management would include handling related taxes, managing escrow accounts, remitting payments and obtaining insurance.

Securitisation process

15. The process of a securitisation is:

(a) first, the origination of assets or credit risk;

(b) second, the transfer of the assets or credit risk; and

(c) third, the issuance of securities to investors.

16. In a securitisation, the cash flow from the pool is used to make payments on obligations to at least 2 tranches or classes of investors (typically holders of debt securities), with each tranche or class being entitled to receive payments from the pool before or after another tranche or class of investors, so that the tranches or classes bear different levels of credit risk.

Special purpose entities

17. A special purpose entity (or SPE) is a legal entity that is created solely for a particular financial transaction or series of transactions. The SPE must not engage in any other business. In a securitisation, an SPE typically purchases and holds the assets for the purposes of the securitisation. The SPE’s payment for the pool is typically funded by debt, including through the issue of securities by the SPE.

18. The purpose of the SPE to facilitate the securitisation, and the extent of a Bank’s involvement in the SPE, should be clear. The SPE’s activities should be limited to those necessary to accomplish that purpose. Most securitisations need the creation of an SPE to:

(a) hold the assets transferred by the originator;

(b) issue securities based on the assets; and

(c) act as intermediary between the originator and the investors.

19. A synthetic securitisation may or may not require an SPE. An SPE may take the form of a limited partnership, limited liability company, corporation, trust or collective investment fund. An SPE may also be established under a special law that allows the creation of SPEs. By its nature, an SPE is a legal shell with only the specific assets transferred by the originator (that is, the SPE has no other property in which any other party could have an interest).

20. An SPE must be bankruptcy-remote from the originator. It must not be consolidated with the originator for tax, accounting or legal purposes. Any undertaking given by a Bank to an SPV must be stated clearly in the transaction documents for the securitization.

Operational requirements for using external ratings

21. Depending on the securitisation structure, 1 or more ECRAs may be involved in rating the securitisation. A Bank must use only ECRAs that have a demonstrated expertise in assessing securitisations. Expertise might be evidenced by strong market acceptance.

22. For the purposes of risk-weighting, an ECRA must take into account the total amount of the Bank’s exposure on all payments owed to it. For example, if the Bank is owed principal and interest, the ECRA’s assessment must have taken into account timely repayment of both principal and interest.

23. A credit rating assigned by an ECRA must be publicly available. If the rating assigned to a facility is not publicly available, the facility must be treated as unrated. The loss and cash flow analysis for the securitisation, and the sensitivity of the rating to changes in the assumptions on which it was made, must also be publicly available. Information required under this section should be published in an accessible form for free. Information that is made available only to the parties to a securitisation is not considered publicly available.

24. A credit rating assigned by an ECRA must be applied consistently across all tranches of a securitisation. A Bank must not use an ECRA’s credit rating for 1 or more tranches and another ECRA’s rating for other tranches within the same securitisation structure (whether or not those other tranches are rated by the first ECRA).

25. Under rules in Chapter 5 of BBR, use of ratings from ECRA should be as follows:

(a) if there are 2 different assessments by ECRAs, the higher risk-weight must be applied; and

(b) if there are 3 or more different assessments by ECRAs, the assessments corresponding to the 2 lowest risk-weights should be referred to and the higher of those 2 risk-weights must be applied.

Calculation of risk-weighted assets

26. A Bank would be taken to maintain effective control over transferred credit risk exposures if:

(a) the Bank is able to repurchase from the transferee the transferred exposures in order to realise their benefits; or

(b) the Bank is obligated to retain the risk of the exposures.

27. A Bank that is an originator may act as servicer of the underlying assets, and the Bank’s retention of servicing rights would not necessarily constitute indirect control over the assets.

Operational requirements for synthetic securitisation

28. In calculating its risk-weighted assets, a Bank that is an originator or sponsor of a synthetic securitisation may exclude securitised exposures only if:

(a) substantially all credit risk associated with the securitised exposures have been transferred;

(b) the CRM technique used to obtain capital relief is eligible financial collateral, an eligible credit derivative, a guarantee or an eligible netting agreement;

(c) the securitisation does not include any terms or conditions that limit the amount of credit risk transferred, such as clauses that:

(i) materially limit the credit protection or credit risk transference (including clauses that provide significant materiality thresholds below which credit protection is not to be triggered even if a credit event occurs and clauses that allow termination of the protection because of deterioration in the credit quality of the underlying exposures);

(ii) require the Bank to alter the underlying exposures to improve the pool’s

weighted average credit quality;

(iii) increase the Bank’s cost of credit protection to the Bank in response to a

deterioration in the credit quality of the underlying exposures;

(iv) allow increases in a retained first loss position or credit enhancement; or

(v) increase the yield payable to parties other than the Bank (for example, payments to investors and providers of credit enhancement) in response to a deterioration in the credit quality of the underlying exposures;

(d) a qualified legal counsel (whether external or in-house) has given a written reasoned opinion that paragraph (c) is satisfied and that the contract for the transfer of the credit risk is enforceable in all relevant jurisdictions;

(e) any clean-up call complies with the rules in this section; and

(f) if the credit risk associated with the securitised exposures is transferred to an SPE:

(i) the securities issued by the SPE are not obligations of the Bank;

(ii) the holders of the beneficial interests in the SPE have the right to pledge or exchange those interests without restriction; and

(iii) the Bank holds no more than 20% of the aggregate original amount of all securities issued by the SPE, unless:

(a) the holdings consist entirely of securities that are rated AAA to AA- (long term) or A-1 (short term); and

(b) all transactions with the SPE are at arm’s length and on market terms and conditions.

Requirements for clean-up calls—traditional and synthetic securitisations

29. A clean-up call is an option that permits the securitisation exposures to be called before all of the underlying exposures or securitisation exposures have been repaid. There is no capital requirement for a securitisation that includes a clean- up call, if:

(a) the exercise of the clean-up call is at the discretion of the originator or sponsor;

(b) the clean-up call is not structured:

(i) to avoid allocating losses to credit enhancements or positions held by investors; or

(ii) to provide credit enhancement; and

(c) the clean-up call may only be exercised:

(i) for a traditional securitisation—when 10% or less of the original underlying pool of assets, or securities issued, remains; or

(ii) for a synthetic securitisation—when 10% or less of the original reference portfolio value remains.

30. For a traditional securitisation, a clean-up call might be carried out by repurchasing the remaining securitisation exposures after the balance of the pool has, or the outstanding securities have, fallen below a specified level. For a synthetic securitisation, a clean-up call might take the form of a clause that extinguishes the credit protection.

31. In the case of a securitisation that includes a clean-up call that does not comply with all of the operational requirements specified in this section, the originator or sponsor must calculate a capital requirement for the securitisation.

32. If the clean-up call is exercised and found to serve as a credit enhancement, the exercise of the call must be considered as implicit support and treated in accordance with the relevant rules in this section addressing implicit support. For a traditional securitisation, the underlying assets must be treated as if they were not securitised. No gain-on-sale of those assets may be recognised.

33. For a synthetic securitisation, a Bank that purchases protection must hold capital against the entire amount of the securitised exposures as if they did not benefit from any credit protection.

Treatment of most senior exposure

34. If the most senior exposure in a securitisation is unrated and the composition of the underlying pool is known at all times, a Bank that holds or guarantees such an exposure may determine the risk weight by applying a “look-through” treatment. The Bank need not consider any interest rate or currency swap when determining whether an exposure is the most senior in a securitisation. In the look-through treatment, the unrated most senior position receives, subject to the AFSA’s review, the average risk-weight of the underlying exposures.

Treatment of second loss position in ABCP programmes

35. An unrated securitisation exposure arising from a second loss position (or better position) in an ABCP programme is subject to a risk-weight of the higher of:

(a) 100%; and

(b) the highest risk-weight applicable to an underlying exposure covered by the facility.

If it satisfies the following conditions:

(a) the exposure is economically in a second loss position or better and the first loss position provides significant credit protection to the second loss position;

(b) the associated credit risk is the equivalent of investment grade or better; and

(c) the Bank holding the exposure does not retain or provide the first loss position.

Treatment of overlapping exposures

36. Overlapping exposures may result if a Bank provides 2 or more facilities (such as liquidity facilities and credit enhancements) in relation to a securitisation that can be drawn under various conditions with different triggers. In effect, the Bank provides duplicate cover to the underlying exposures. For the purposes of calculating its capital requirements, a Bank’s exposure (exposure A) overlaps another exposure (exposure B) if in all circumstances the Bank will preclude any loss to it on exposure B by fulfilling its obligations with respect to exposure A.

37. If a Bank has 2 or more overlapping exposures to a securitisation, the Bank must, to the extent that the exposures overlap, include in its calculation of risk-weighted assets only the exposure, or portion of the exposure, producing the higher or highest risk-weighted assets amount. If the overlapping exposures are subject to different credit conversion factors, the Bank must apply the higher or highest factor to the exposures.

38. An example of the treatment of an overlapping exposure is given here:

If, under exposure A, a Bank provides full credit support to some notes while simultaneously holding as exposure B a portion of those notes, its full credit support obligation precludes any loss from its exposure from its holding of the notes. If the Bank can satisfactorily show that fulfilling its obligations with respect to exposure A will preclude a loss from its exposure B under any circumstance, there are overlapping exposures between the 2 exposures and the Bank need not calculate risk-weighted assets for exposure B.

Liquidity facility and eligible liquidity facility

39. A liquidity facility, for a securitisation, is a commitment from the facility provider to provide liquid funds if:

(a) funds are needed to meet contractual payments to investors; and

(b) there is a delay between the date of collection of the related cash flows and the date on which the payment to the investors is due.

40. Liquidity facilities are required to be built into securitisation structures to address and manage timing mismatches between cash collections from the underlying assets and the scheduled payments to the investors in certain situations.

41. To be an eligible liquidity facility:

(a) the commitment to provide liquid funds must be in writing and must clearly state the circumstances under which the facility may be availed of and the limits for any drawdown;

(b) drawdowns must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements;

(c) the facility must not cover any losses incurred in the underlying pool of exposures before a drawdown;

(d) the facility must not be structured in such a way that drawdowns are certain;

(e) the facility must be subject to a condition that precludes it from being availed of to cover credit risk exposures that are past due for more than 90 days;

(f) if the exposures that the facility is required to fund are ECRA-rated securities, the facility can only be used to fund securities that are rated, by an ECRA, investment grade at the time of funding;

(g) the facility cannot be availed of after all applicable credit enhancements (whether transaction-specific or programme-wide enhancements), from which the liquidity would benefit, have been exhausted; and

(h) the repayment of drawdowns on the facility (that is, assets acquired under a purchase agreement or loans made under a lending agreement):

(i) must not be subordinated to any interests of any note holder in the programme (such as an ABCP programme); and

(ii) must not be subject to deferral or waiver.

42. If a Bank that is an originator or sponsor of a securitisation also provides a liquidity facility that is not an eligible servicer cash advance facility to the securitisation, the risk-weight of the exposure from the facility must be calculated by:

(a) applying:

(i) a 50% credit conversion factor (regardless of the maturity of the facility) if the facility is an eligible liquidity facility; or

(ii) a 100% credit conversion factor if the facility is not an eligible liquidity

facility; and

(b) multiplying the resulting credit equivalent amount by the applicable risk- weight in table 5H in Chapter 5 of the BBR, depending on the credit rating of the Bank (or by 100% if the Bank is unrated).

However, if an ECRA rating of the facility is itself used for risk- weighting the facility, a 100% credit conversion factor must be applied.

Treatment of unrated eligible liquidity facility

43. A Bank providing an eligible liquidity facility that is unrated, or that is treated as unrated, must apply to the resulting securitisation exposure the highest risk weight that would be applied to an underlying exposure covered by the facility. An eligible liquidity facility must be treated as unrated, when the facility’s rating is not publicly available or when the facility is provided to a particular securitisation exposure (such as a particular tranche) and the resulting mitigation is reflected in the ECRA rating of the securitisation.

Treatment of eligible servicer cash advance facility

44. A servicer cash advance facility is a liquidity facility under which a servicer to a securitisation advances cash to ensure timely payment to investors. A zero percent risk-weight may be applied to an undrawn servicer cash advance facility only if the facility is an eligible servicer cash advance facility. If the servicer cash advance facility is not an eligible servicer cash advance facility, the facility must be treated according to the paragraph 42 above of this section.

45. To be an eligible servicer cash advance facility:

(a) the servicer must be entitled to full reimbursement;

(b) the servicer’s right to reimbursement must be senior to other claims on cash flows from the underlying pool;

(c) the facility is itself an eligible liquidity facility; and

(d) the facility may be cancelled at any time, without any condition and without any need to give advance notice.

Effect of CRM techniques

46. If a CRM technique is provided to specific underlying exposures or the entire pool of exposures by an eligible protection provider and the credit risk mitigation is reflected in the ECRA rating assigned to a securitisation exposure, the risk-weight based on that rating must be used. To avoid double-counting, no additional capital recognition is permitted.

47. Eligible protection provider means:

(a) a central counterparty;

(b) the Republic of Kazakhstan or any other sovereign;

(c) an entity that is treated as a sovereign in accordance with the Basel Accords;

(d) a public sector enterprise or other entity that has:

(i) a risk-weight of 20% or lower; and

(ii) a lower risk-weight than the party to whom the protection is provided; or

(e) a parent entity, subsidiary or affiliate of a party to whom the protection is provided that has a lower risk-weight than the party.

48. If the provider of the CRM technique is not an eligible protection provider, a Bank must treat the exposure as unrated. A Bank must not use an ECRA rating if the assessment by the ECRA is based partly on unfunded support provided by the Bank itself.

49. If a Bank buys ABCP for which it provides an unfunded securitisation exposure (such as a liquidity facility or credit enhancement) to the ABCP programme and the exposure plays a role in determining the credit assessment on the ABCP, the Bank must treat the ABCP as if it were unrated.

50. If the CRM technique is provided solely to protect a particular securitisation exposure (for example, if the technique is provided to a tranche of the securitisation) and the protection is reflected in the ECRA rating of the securitisation, a Bank must treat the exposure as unrated. This applies to a securitisation exposure whether it is in the Bank’s trading book or banking book. The capital requirement for a securitisation exposure in the trading book must not be less than the amount that would be required if the exposure were in the Bank’s banking book.

51. For the treatment of an exposure arising from a liquidity facility of the kind described in paragraph (50) above of this section, please follow the method set out in paragraph 43 of this section relating to treatment of unrated eligible liquidity facility.

Early amortisation provisions

52. An early amortisation provision in a securitisation is a mechanism that, if triggered, allows investors to be paid out before the originally stated maturity of the securities issued. An early amortisation provision may be controlled or non-controlled. Triggers employed could include economic triggers which are events that are economic in nature by reference to the financial performance of the transferred assets.

53. An early amortisation provision is a controlled early amortisation provision if:

(a) the Bank concerned has appropriate capital and liquidity plans to ensure that it has sufficient capital and liquidity if the provision is triggered; and

(b) throughout the life of the securitisation (including the amortisation period) there is the same pro-rata sharing of interest, principal, expenses, losses and recoveries based on the Bank’s and investors’ relative shares of the receivables outstanding at the beginning of each month.

An early amortisation provision that fails to meet either requirement in this paragraph is a non-controlled early amortisation provision.

Operational requirements for securitisations with early amortisation provisions

54. A securitisation involving revolving exposures that is originated or sponsored by a Bank is taken to fail the operational requirements set out in rule 5.21 (6) for securitisations or

operational requirements for synthetic securitisations provided in paragraph 28 of this chapter, if the securitisation has an early amortisation provision (or a similar provision) that, if triggered, will:

(a) subordinate the Bank’s senior or equal interest in the underlying revolving credit facilities to the interest of other investors;

(b) subordinate the Bank’s subordinated interest to an even greater degree

relative to the interests of other parties; or

(c) increase in any other way the Bank’s exposure to losses associated with the underlying revolving credit facilities.

55. A Bank that is the originator or sponsor of a securitisation that does not involve revolving exposures may exclude the underlying exposures from the calculation of risk-weighted assets if:

(a) the securitisation is a replenishment structure; and

(b) the securitisation has an early amortisation provision that ends the ability of the Bank to add new exposures.

56. A Bank that is the originator or sponsor of a securitisation involving revolving exposures may exclude the underlying exposures from the calculation of risk-weighted assets if:

(a) the securitisation meets the relevant operational requirements referred in paragraph 54 above; and

(b) the securitisation has an early amortisation provision of the kind described in any of the following subparagraphs:

(i) the securitisation relates to revolving credit facilities that themselves have early amortisation features that mimic term structures (that is, where the risk on the underlying exposures does not return to the Bank) and the early amortisation provision in the securitisation, if triggered, would not effectively result in subordination of the Bank’s interest;

(ii) the Bank securitises 1 or more revolving credit facilities and investors remain fully exposed to future drawdowns by borrowers even after an early amortisation event has occurred;

(iii) the early amortisation provision is solely triggered by events not related to the performance of the securitised assets or of the Bank (such as material changes in tax laws or regulations).

57. The Bank must still hold regulatory capital against any securitisation exposures that it retains in relation to the securitisation.

Capital charges for securitisation involving revolving exposures with early amortisation

58. A Bank that is an originator or sponsor of a securitisation involving revolving exposures that has an early amortisation provision must calculate an additional capital charge to cover the possibility that the Bank’s credit risk exposure may increase if the provision is triggered. The charge must be calculated for the total exposure related to the securitisation (that is, for

both drawn and undrawn balances related to the securitised exposures). If the underlying pool of a securitisation is made up of both revolving exposures and term exposures, the Bank must apply the amortisation treatment only to the portion of the underlying pool made up of those revolving exposures.

Capital charges for securitisation involving revolving exposures with controlled early amortisation

59. A Bank that is an originator or sponsor of a securitisation involving revolving exposures that has a controlled early amortisation provision must calculate a capital charge for the investors’ interest (that is, against both drawn and undrawn balances related to the securitised exposures). The capital charge is the product of:

(a) the investors’ interest;

(b) the appropriate credit conversion factor in accordance with table H1 in this section, depending on whether the securitised exposures are uncommitted retail credit lines or not; and

(c) the risk weight for the kind of underlying exposures (as if those exposures had not been securitised).

60. For uncommitted retail credit lines (such as credit card receivables) in securitisations that have controlled early amortisation provisions that can be triggered by the excess spread falling to a specified level, a Bank must compare the three-month average excess spread to the point at which the bank is required to trap excess spread (the excess spread trapping point) as economically required by the structure. If a securitisation does not require the trapping of excess spread, the excess spread trapping point for the securitisation is 4.5 percentage points (450 basis points) more than the excess spread at which early amortisation is triggered.

61. A Bank that is the originator or sponsor of a securitisation must divide the securitisation’s excess spread by the securitisation’s excess spread trapping point to determine the appropriate segments and apply the corresponding credit conversion factor for uncommitted credit lines in accordance with table 5 I.

Table H1 Credit conversion factors (CCFs) for securitisation involving revolving exposures with controlled early amortisation

Column 1 Item

Column 2 Segments

Column 3 CCFs for uncommitte d credit lines

Column 4 CCFs for committe d credit


Retail credit lines



1

133.33% of trapping point or more

0

90

2

<133.33% to 100% of trapping

point

1

90

3

<100% to 75% of trapping

2

90

4

<75% to 50% of trapping point

10

90

5

<50% to 25% of trapping point

20

90

6

<25% of trapping point

40

90

7

Non-retail credit lines

90

90

62. The capital charge to be applied for securitisations involving revolving exposures with controlled early amortisation is the higher of the capital requirement for retained securitisation exposures in the securitisation and the capital requirement that would apply if the exposures had not been securitised. The Bank must also deduct from its CET1 the amount of any gain-on- sale and credit-enhancing interest-only strips arising from the securitisation.

Capital charges for Securitisation involving revolving exposures with non-controlled early amortisation

63. A Bank that is an originator or sponsor of a securitisation involving revolving exposures that has a non-controlled early amortisation provision must calculate a capital charge for the investors’ interest (that is, against both drawn and undrawn balances related to the securitised exposures). The capital charge is the product of:

(a) the investors’ interest;

(b) the appropriate credit conversion factor in accordance with table H1 in this section, depending on whether the securitised exposures are uncommitted retail credit lines or not; and

(c) the risk weight for the kind of underlying exposures (as if those exposures had not been securitised).

64. For uncommitted retail credit lines (such as credit card receivables) in securitisations that have non-controlled early amortisation provisions that can be triggered by the excess spread falling to a specified level, a Bank must compare the three-month average excess spread to the point at which the bank is required to trap excess spread (the excess spread trapping point) as economically required by the structure. If a securitisation does not require the trapping of excess spread, the excess spread trapping point for the securitisation is 4.5 percentage points more than the excess spread at which early amortisation is triggered.

65. A Bank that is the originator or sponsor of a securitisation must divide the securitisation’s excess spread by the securitisation’s excess spread trapping point to determine the appropriate segments and apply the corresponding credit conversion factor for uncommitted credit lines in accordance with table H2.

Table H2 Credit conversion factors (CCFs) for securitisations involving revolving exposures with non-controlled early amortisation

Column 1 Item

column 2 Segments

Column 3 CCFs for uncommitted

Column 4 CCFs for committed credit lines %


Retail credit lines



1

133.33% of trapping point or

0

100

2

<133.33% to 100% of trapping point

5

100

3

<100% to 75% of trapping point

15

100

4

<75% to 50% trapping point

50

100

5

<50% of trapping point

100

100

6

Non-retail credit lines

100

100


I. Provisioning requirements Review of provisions made

1. A review of a Bank’s write-offs can help identify whether the Bank’s provisioning policy results in over-provisioning or under-provisioning.

2. The AFSA regularly assesses trends and concentrations in risk and risk build-up across financial entities in relation to problem assets. In making the assessment, the authority takes into account any observed concentration in the CRM techniques used by Banks and the potential effect on the efficacy of those techniques in reducing loss. The authority would consider the adequacy of provisions for a Bank (and the industry in general) in the light of the assessment.

3. The AFSA might seek the opinion of external experts in assessing the adequacy of a Bank’s policies for grading and classifying its assets and the appropriateness and robustness of the levels of its provisions.

4. If the AFSA considers that existing or anticipated deterioration in asset quality is of concern or if the provisions do not fully reflect expected losses, the authority may require the Bank to adjust its classifications of individual assets, increase its levels of provisions or capital and, if necessary, impose other remedial measures.

J. Transactions with related parties Concept of related parties

1. The concept of parties being related to a Bank is used in the BBR rule 5.23 in the context of parties over which the Bank exercises control or parties that exercise control over the Bank. The concept is primarily used in relation to the requirement that the Bank’s transactions be at arm’s length. In contrast, the concept of parties being connected to one another (which is discussed with concentration risk in Chapter 5 of BBR) is used in these rules to measure concentration risk and large exposures. It is of course possible for connected counterparties to be related to the Bank holding the exposure concerned.

2. Related party is wider than a Bank’s corporate group in that it includes individuals. Related parties include the Bank’s subsidiaries and major stock holders; members of its governing body; its senior management and key employees.

3. To guard against abuses in lending to related parties and to address conflicts of interest, this rule requires transactions with related parties to be at arm’s length and subject to appropriate supervision and limits. Related-party transactions must be interpreted broadly. Related party transactions include on-balance-sheet and off-balance-sheet credit exposures, service contracts, asset purchases and sales, construction contracts, lease agreements, derivative transactions, borrowing and write-offs.

4. For purposes of concentration risk, the Bank’s exposure to connected counterparties (whether related or not) is taken to be a single risk. Additional guidance on related party transactions

5. Favourable terms could relate to interest rate, credit assessment, tenor, fees, amortisation schedule and need for collateral. An exception for beneficial terms could be appropriate if it is part of an employee’s remuneration package (for example, more favourable loan rates to employees).

K. Concentration Risk Definition of Connected Parties

1. Parties would be connected if the same persons significantly influence the governing body of each of them. Parties would be connected if one of them has an exposure to the other that was not incurred for the clear commercial advantage of both of them and is not on arm’s length terms. Parties would be connected if they are so closely linked that:

(a) the insolvency or default of 1 is likely to be associated with the insolvency or default of the other;

(b) it would be prudent when assessing the financial condition or creditworthiness of 1 to consider that of the other; or

(c) there is, or is likely to be, a close relationship between their financial performance.

2. Parties would be connected if a Bank has exposures to them and any loss to the Bank on any of the exposures to one of the parties is likely to be associated with a loss to the Bank with respect to at least one exposure to each of the others.

3. Two or more individuals or legal persons would constitute a single risk if they are so connected that, if one of them were to experience financial problems, the other or others would be likely to encounter repayment difficulties. Connected counterparties should be identified and the procedures to manage the combined credit risk considered. A Bank may need to monitor and report the gross exposure to connected counterparties against combined limits in addition to monitoring the exposure to each counterparty.

Concentration Risk

4. Significant sources of concentration risk include:

(a) concentration of exposures to a single counterparty or connected counterparties;

(b) concentration of exposures to counterparties in the same industry, sector, region or country; and

(c) concentration of exposures to counterparties whose financial performance depends on the same activity or commodity.

5. A concentration of exposures would also arise if a Bank accepts collateral or credit protection provided by a single provider.

6. A Bank’s policy should be flexible to help the Bank to identify risk concentrations. To achieve

this, the systems should be capable of analysing the Bank’s credit portfolio by:

(a) size of exposure

(b) exposure to connected counterparties

(c) product

(d) geography

(e) industry or sector (for example, manufacturing and industrial)

(f) account performance management

(g) internal credit risk assessment

(h) funding

(i) outstandings versus commitments

(j) types and coverage of collateral.

7.

8.

9.

Funding Strategy

L. uidity Risk management

Chapter 4 Capital Adequacy

A. Introduction

1. Capital adequacy is a critical to the safety and soundness of a Bank. This is reflected in the predominance of global regulatory standards addressing capital adequacy for banks, as established by the Basel Committee for Banking Supervision.

2. Capital supports a Bank’s operation by providing a buffer to absorb losses from its activities and, in the event of problems, it enables the Bank to continue to operate in a sound and viable manner while the problems are resolved. Capital management must be an integral part of a Bank’s credit risk management process and must align the Bank’s risk tolerance and risk profile with its capacity to absorb losses.

3. This chapter of the CAG sets out the standards, guidance, parameters and norms required to comply with the rules in respect of the Capital Adequacy as well as capital management framework and governance, as specified in Chapter 4 of BBR. These elements convey the supervisory expectations of the AFSA on Capital Adequacy and on capital management framework & its governance. Compliance with the standards, methods, norms, parameters and guidance detailed in this chapter of CAG, both in letter and in spirit, is required to demonstrate fulfillment of the regulatory obligations specified in Chapter 4 of BBR. The AFSA will use these standards, norms and key elements specified here to assess compliance with BBR Rules on Capital Adequacy and capital management.

B. Capital Management - Framework & Governance

1. In respect of BBR Rule 4.3, the risk tolerance of a Bank is usually defined as part of the Bank’s risk management strategy. It may be referred as risk appetite in some cases. The terms ‘risk tolerance’ and ‘risk appetite’ embrace all relevant definitions used by different institutions and supervisory authorities. These two terms are used interchangeably to

describe both the absolute risks a Bank is open to take (which some may call risk appetite) and the actual limits within its risk appetite that a Bank pursues (which some call risk tolerance).

2. If the Bank is a member of a financial group, the AFSA expects the capital of the financial group to be apportioned among the group’s members, based on the allocation of risks between them.

3. In relation to BBR Rule 4.4 (3), a Bank’s internal capital adequacy assessment process or ICAAP is the process by which the Bank continuously demonstrates that it has implemented methods and procedures to ensure that it has adequate capital resources to support the nature and level of its risks. ICAAP is a critical component of the Pillar 2 process forming part of the Basel III framework for prudential regulation of banks.

4. For Rule 4.14, Retained earnings and other comprehensive income include appropriated profit or loss. Share premium is also known as stock surplus and constitutes additional paid-in capital. An example of disclosed reserve is the foreign currency translation reserve referred in chapter 6 of the BBR.

5. In relation to BBR rule 4.20, Conversion or write-off under this rule would be limited to the extent necessary to enable the AFSA to conclude that the Bank is viable without further conversion or write-off.

6. While addressing permitted adjustments to regulatory capital as defined in BBR rule 4.28, any deferred tax liability that may be netted must be allocated pro rata between deferred tax assets under this rule and those under the threshold deduction rule. For the treatment of deferred tax assets that relate to temporary differences (for example, allowance for credit losses), the relevant rule is BBR rule 4.30 which defines deductions from CET1 Capital.

C. Capital Conservation Buffers

1. This section provides additional guidance and examples for the purpose of complying with BBR rule 4.32, in respect of capital conservation buffer. In this respect, a payment made by a Bank that does not reduce its CET 1 capital is not a distribution for the purposes of this Part. Distributions include, for example, dividends, share buybacks and discretionary bonus payments.

Examples of application of table 4A

2. Assume that a Bank’s minimum CET 1 capital ratio is 4.5% and an additional 2.5% capital conservation buffer (which must be made up of CET 1 capital) is required for a total of 7% CET 1 capital ratio. Based on table 3.3.3:

(a) If a Bank’s CET 1 capital ratio is 4.5% or more but less than 5.125%, the Bank needs to conserve 100% of its earnings.

(b) If a Bank’s CET 1 capital ratio is 5.125% or more but less than 5.75%, the Bank needs to conserve 80% of its earnings and must not distribute more than 20% of those earnings by way of dividends, share buybacks and discretionary bonus payments.

(c) A Bank with a CET 1 capital ratio of more than 7% can distribute 100% of its earnings.

3. Earnings in respect of BBR rule 4.32 means distributable profits calculated before deducting elements subject to the restrictions on distributions. Earnings must be calculated after notionally deducting the tax that would have been payable had none of the distributable items been paid. The effect of calculating earnings after tax is that the tax consequence of the distribution is reversed out.

4. For the purpose of BBR rule 4.34, the following are examples of ways to reduce capital by a bank:

(a) a share buyback or the redemption, repurchase or repayment of capital instruments issued by the Bank

(b) trading in the Bank’s own shares or capital instruments outside an arrangement

agreed with the AFSA

(c) a special dividend.

D. Leverage Ratio

1. This section provides the guidance, method and parameters required for calculation of the Leverage Ratio of a Bank in compliance with the formula provided in BBR rule 4.37.

2. The Exposure Measure under Rule 4.37 should be calculated as the sum of:

(a) on-balance sheet items; and

(b) off-balance sheet items.

3. In relation to on-balance sheet items:

(a) for SFTs, the exposure value should be calculated in accordance with IFRS and the netting requirements referred to in rules on credit risk mitigation in Chapter 5 of BBR;

(b) for Derivatives, including credit protection sold, the exposure value should be calculated as the sum of the on-balance sheet value in accordance with IFRS and an add-on for potential future exposure calculated in accordance with rules on credit risk mitigation in Chapter 5 of BBR; and

(c) for other on-balance sheet items, the exposure value should be calculated based on their balance sheet values in accordance with rules in Chapter 5 of BBR.

4. In relation to off-balance sheet items:

(a) for commitments that are unconditionally cancellable at any time by the Bank without prior notice, the exposure value should be the notional amount for the item multiplied by a CCF of 10%; and

(b) for other off-balance sheet items, including:

(i) direct credit substitutes;

(ii) certain transaction-related contingent items;

(iii) short-term self-liquidating trade-related contingent items and commitments to underwrite debt and equity securities;

(iv) note issuance facilities and revolvingunderwriting facilities;

(v) transactions, other than SFTs, involving the posting of securities held by the Bank as collateral;

(vi) asset sales with recourse, where the credit risk remains with the Bank;

(vii) other commitments with certain drawdown;

(viii) any other commitments; and

(ix) unsettled transactions,

the exposure value should be the notional amount for each of the items multiplied by a CCF of 100%.

*Amendments to the AIFC Glossary (Annex 3)

*Amendments to the AIFC Conduct of Business Rules (Annex 3)

*Amendments to the AIFC General Rules (Annex 3)

Amendments to the AIFC FSFR (Annex 1)

AIFC FINANCIAL SERVICES FRAMEWORK REGULATIONS (FSFR)

In this Appendix, a blue font and underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

39. Exemption for Authorised Market Institutions

An Authorised Investment Exchange is exempt from the General Prohibition in respect of any Regulated Activity:

which is carriedon as a part of the Authorised Investment Exchange's business as an investment exchange; or

which is carriedon for the purposes of, or in connection with, the provisionby the Authorised Investment Exchange of services designed to facilitate the provision of clearing services by anotherPerson.

An Authorised Clearing House is exempt from the General Prohibition in respect of any Regulated Activity:

which is carried on for the purposes of, or in connection with, the provision of clearing services by the Authorised Clearing House; or

which is carried on for the purposes of, or in connection with, the provision by the Authorised Clearing House of services designed to facilitate the provision of clearing services by another Person.

An Authorised Virtual Currency Trading Facility is exempt from the General Prohibition in respect of any Regulated Activity:

which is carried on as a part of the Authorised Virtual Currency Trading Facility's business as an virtual currency trading; or

which is carried on for the purposes of, or in connection with, the provision by the Authorised Virtual Currency Trading Facility of services designed to facilitate the provision of clearing services by another Person.

55. Persons eligible for Membership

Subject to such further admission criteria as the AFSA may prescribe by Rules, an Authorised Market Institution may only admit as a Member:

an Authorised Firm;or

a Recognised Non-AIFCMember;

An Authorised Person engaged in the activity of Operating a Virtual Currency Business may only admit as a Member a Person who satisfies admission criteria set out in its Membership Rules and which is either:

an Authorised Firm;

a Recognised Non-AIFC Member; or

a body corporate or an individual (natural person) that carries on the activity solely as principal.

AFSA power to impose requirements on an Authorised Market Institution

Without limiting the powers available to the AFSA under Part 8 (Supervision of Authorised Persons), the AFSA may direct an Authorised Market Institution to do or not do specified things that the AFSA considers are necessary or desirable or to ensure the integrity of the AIFC financial markets, including but not limited to directions:

requiring compliance with any duty, requirement, prohibition, obligation or responsibility applicable to an Authorised Market Institution; or

requiring an Authorised Market Institution to act in a specified manner in relation to a transaction conducted on or through the facilities operated by an Authorised Market Institution, or in relation to a specified class of transactions; or

requiring an Authorised Market Institution to act in a specified manner or to exercise its powers under any rules that the Authorised Market Institution has made; or

excluding the application of any requirements for engaging in the activity of Operating a Virtual Currency Business imposed by the rules; or

imposing on an Authorised Person engaged in the activity of Operating a Virtual Currency Business any additional requirements that the AFSA considers appropriate.

AFSA power to give directions to an Authorised Market Institution

Without limiting the application of section 95 (Exercise of supervisory powers by the AFSA), the AFSA may direct an Authorised Market Institution to:

close the marketor facilities operatedby an Authorised Market Institution in a particular manner or for a specified period; or

suspend transactions on the marketor through the facilities operatedby the Authorised Market Institution; or

suspend transactions in Securities or Virtual Currencies conducted on the market or through the facilities operated by the Authorised Market Institution; or

prohibit trading in Securities or Virtual Currencies conducted on the market or through the facilities operated by the Authorised Market Institution; or

defer for a specified period the completion date of transactions conducted on the market or through the facilities operated by the Authorised Market Institution; or

prohibit a specified Person from undertaking any transactions on the facilities operated by the Authorised Market Institution; or

do any act or thing, or not do any act or thing, in order to ensure an orderly

market, or reduce risk to the AFSA’s objectives.

Schedule 3: Market Activities

3. Operating a Virtual Currency Trading Facility

Operating a Virtual Currency Trading Facility means operating a facility which functions regularly and brings together multiple third parties (whether as principalor agent):

buying, selling or exchanging Virtual Currencies for a Real (Fiat) currency, and/or

exchanging one Virtual Currency for another Virtual Currency,

in its facility and in accordance with its non-discretionary rules – in a way that results in a contract.

Guidance

The following activities do not constitute Operating a Virtual Currency Business–

trading of Virtual currencies for its own investment purpose;

the issuance of Virtual Currencies by a Person and their administration (including sale, redemption);

any other activity or arrangement that is deemed by the AFSA to not constitute Operating a Virtual Currency Business, where necessary and appropriate in order for the AFSA to pursue its objectives.

Amendments to the AIFC GEN (Annex 2)

AIFC GENERAL RULES (GEN)

In this Appendix, a blue font and underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

1.2. Authorised Market Institutions

Guidance: Definition of Market Activity

Market Activity is defined in the section 18 of the Framework Regulations as:

Operating an Exchange; and

Operating a Clearing House;

Operating a Virtual Currency Trading Facility.

Effective supervision

In assessing whether an applicant is capable of being effectively supervised by the AFSA for the purposes of section 37(1)(c) of the Framework Regulations, the AFSA will consider:

the nature, including the complexity, of the Market Activities that the applicant will carry on;

ifthe applicant seeks a licenceto carry on the MarketActivity of Operating an Exchange or a Virtual Currency Trading Facility, the size, nature and complexity of any markets in respect of which the applicant will offer its facilities as an exchange in carrying on that Market Activity;

Compliance arrangements

In assessing whether an applicant has adequate compliance arrangements for the purposes of section 37(1)(d) of the Framework Regulations, the AFSA will consider whether it has:

clear and comprehensive policies and procedures relating to compliance with all applicable legal requirements;

adequate means to implement those policies and procedures and monitor that they are operating effectively and as intended;

effective arrangements for monitoring and enforcing compliance of its Members with its own rules and, if relevant, its clearing and settlement arrangements; and

ifthe applicant seeks a licenceto carry on the MarketActivity of Operating an Exchange, effective arrangements to verify that issuers admittedto trading on its facilities comply with the Market Rules; and

if the applicant seeks a licenceto carry on the MarketActivity of Operating an Virtual Currency Trading Facility, effective arrangements to verify that members admitted to trading on its facilities comply with the Conduct of Business Rules.

Schedule 1: REGULATED ACTIVITIES

5. Providing Custody

Providing Custody means one or more of the following activities:

safeguarding and administering Investments belonging to another Person; or

in the case of a Fund, safeguarding and administering Fund Property; or

safeguarding and administering Virtual Currencies belonging to another Person.

Amendments to the AIFC AMI (Annex 3)

AIFC AUTHORISED MARKET INSTITUTION RULES (AMI)

In this Appendix, a blue font and underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Contents

RULES APPLICABLE TO AUTHORISED VIRTUAL CURRENCY TRADING FACILITY

Main requirements relating to trading on the facility 6.2. Requirement to prepare Rules

Admission of Virtual Currencies to trading

Suspending or removing Virtual Currencies from trading 6.5. Transparency obligations

6.6. Additional requirements on technology resources

1.1.1. Definitions

(1) An Authorised Market Institution is a CentreParticipant which has been licensed by the AFSA to carry on one or more Market Activities. An Authorised Market Institution can be an Authorised Investment Exchange, an Authorised Virtual Currency Trading Facility and/or an Authorised Clearing House.

(7) An Authorised Virtual Currency Trading Facility is a Centre Participant which has been licensed by the AFSA to carry on the Market Activity of Operating a Virtual Currency Trading Facility.

2.4.4. Resources of Members

An Authorised Market Institution must ensure that its Members and other participants on its facilities have sufficient and secure technology resources which are compatible with its own.

The requirements in (1) do not apply to the Member of an Authorised Virtual Currency Trading Facility if the Member is a body corporate or an individual (natural person) that carries on the activity solely as principal.

2.4.7. Testing relating to Members’ technology systems

An Authorised MarketInstitution must implement standardised conformance testing procedures to ensure that the systemswhich its Membersare using to accessfacilities operated by it have a minimumlevel of functionality that is compatible with the Authorised Market Institution’s information  technology systems and will not pose any threatto fair and orderly conductof its facilities.

An Authorised Market Institution must also require its Members, before commencing live operation of any electronic trading system, user interface or a trading algorithm, including any updates to such arrangements, to use adequate development and testing methodologies to test the viability and effectiveness of their systems, to include system resilience and security.

For the purposes of (2), an Authorised Market Institution must require its Members:

to adopt trading algorithm tests, including tests in a simulation environment which are commensurate with the risks that such a strategy may pose to itself and to the fair and orderly functioning of the facility operated by the Authorised Market Institution; and not to deploy trading algorithms in a live environment except in a controlled and cautious manner.

The requirements in (1)-(3) do not apply to the Member of an Authorised Virtual Currency Trading Facility if the Member is a body corporate or an individual (natural person) that carries on the activity solely as principal.

2.5.1. Requirement to prepare Business Rules

Save where the AFSA otherwise directs, an Authorised Market Institution must establish and maintain Business Rules governing relations between itself and the participants in the market, including but not limited to:

(d) Admission to Trading Rules, prepared in accordance with AMI 3.2 or AMI 6.3., or Admission to Clearing Rules,prepared in accordance with AMI 4.1, governing the admission of Securities or Virtual Currencies to trading, or clearing and settlement, as appropriate to its facilities;

(g) The requirements in (c) and (e) do not apply to the Authorised Virtual Currency Trading Facility.

2.6.1. Persons eligible for Membership

An Authorised Market Institution, except Authorised Virtual Currency Trading Facility, may only admit as a Member a Person who satisfies admissioncriteria set out in its Membership Rules and which is either:

an Authorised Firm whose Licence permits it to carry on the Regulated Activities of Dealing in Investments; or a Recognised Non-AIFCMember

An Authorised Virtual Currency Trading Facility may only admit as a Member a Person who satisfies admission criteria set out in its Membership Rules and which is:

an Authorised Firm whose Licence permits it to carry on the Regulated Activities of Dealing in Investments;

a Recognised Non-AIFC Member; or

a body corporate or an individual (natural person) that carries on the activity solely as principal.

2.6.4. Undertaking to comply with AFSA rules

An Authorised Market Institution may not admit a Recognised Non-AIFC Member as a Member unlessit:

agrees in writingto submit unconditionally to the jurisdiction of the AFSA in relation to any matters which arise out of or which relate to its use of the facilities of the Authorised Market Institution;

agrees in writingto submit unconditionally to the jurisdiction of the AIFC Courts in relation to any disputes, or other proceedings in the AIFC, which arise out of or relate to its use of the facilities of the Authorised Market Institution;

agrees in writing to subject itself to the AIFC laws in relation to its use of the facilities of the Authorised Market Institution; and

where the Recognised Non-AIFC Member is incorporated outside the Republic of Kazakhstan, appoints and maintainsat all times, an agent for service of process in the Republic of Kazakhstan.

The requirements in (1) apply to the Member of an Authorised Virtual Currency Trading Facility if the Member is a body corporate or an individual (natural person) that carries on the activity solely as principal.

Direct Electronic Access

Direct Electronic Access means any arrangement, such as the use of the Member's trading code, through which a Member or the clients of that Member are able to transmit electronically orders relating to Securities or Virtual Currency directly to the facility provided by the Authorised Market Institution and includes arrangements which involve the use by a Person of the infrastructure of the Authorised Virtual Currency Trading Facility or the Member or participant or client or any connecting system provided by the Authorised Virtual Currency Trading Facility or Member or participant or client, to transmit the orders and arrangements where such an infrastructure is not used by a Person

Direct electronic access – general conditions

An Authorised Market Institution may only permit a Member specified in AMI 2.6.1(1)(a) and (b) to provide its clients Direct Electronic Access to the Authorised Market Institution's facilities where the clients meet the suitability criteria established by the Member in order to meet the requirements in AMI 2.7.3.

Direct electronic access – criteria, standards and arrangements

An Authorised Market Institution which permits its Members to have direct electronic access to its trading facilities or permits its Members to allow their clients to have Direct Electronic Access to its trading facilities must:

ensure that a Member allowing its clients to have direct electronic access to the trading facilities of an Authorised Market Institution is only permitted to provide direct electronic access to the venue if the Member is an Authorised Person;

Direct electronic access rules

An Authorised Market Institution operating a trading venue which permits Direct Electronic Access through it systems must set out and publish the rules and conditions pursuant to which its Members specified in AMI 2.6.1(1)(a) and (b) may provide Direct Electronic Access to their clients.Those rules and conditions must at least cover the specific requirements set outbelow:

2.9.2. Custody and investment risk

An Authorised Market Institution must have effective means to address risks relating to:

custody of its own assets, in accordance with (2), if it is an Authorised Clearing House; or

investments, in accordance with (3), if it is an Authorised Investment Exchange; or

Virtual Currencies, if it is an Authorised Virtual Currency Trading Facility.

RULES APPLICABLE TO AUTHORISED VIRTUAL CURRENCY TRADING FACILITY

Main requirements relating to trading on the facility

An Authorised Virtual Currency Trading Facility must, at the time a Licence is granted and at all times thereafter, have:

transparent and non-discriminatory rules and procedures to ensure fair and orderly trading of Virtual Currencies on its facility;

objective criteria governing access to its facility;

objective and transparent criteria for determining the Investments that can be traded on its facility; and

adequate technology resources.

An Authorised Virtual Currency Trading Facility must maintain effective arrangements to verify that its members comply with requirements set out in COB, AML.

An Authorised Virtual Currency Trading Facility must not introduce a liquidity incentive scheme unless it has obtained the prior approval of the AFSA.

For the purposes of (1), an Authorised Virtual Currency Trading Facility must make available to the public, without any charges data relating to the quality of execution of transactions on the Authorised Virtual Currency Trading Facility on at least an annual basis. Reports must include details about price, costs, speed and likelihood of execution for individual Virtual Currencies.

Requirement to prepare Rules

An Authorised Virtual Currency Trading Facility’s Rules must:

be based on objective criteria;

be non-discriminatory;

be clear and fair;

be made publicly available free of charge;

 contain provisions for the resolution of Members’ and other participants’

disputes;

contain provisions for penalties or sanctions which may be imposed by the Authorised Virtual Currency Trading Facility for a breach of the Rules; and

contain provisions for an appeal process from the decisions of the Authorised Virtual Currency Trading Facility.

An Authorised Virtual Currency Trading Facility prior approval of its Rules (Business Rules, Admission to Trading Rules, Membership Rules) and amendments to its Rules must:

make available for market consultation for no less than 30 days; and

obtain approval of the AFSA.

In urgent cases, the AFSA may, on written application by the Authorised Virtual Currency Trading Facility, dispense with the requirement in (2)(a).

Where an Authorised Virtual Currency Trading Facility has made any amendments to its Rules, it must have adequate procedures for notifying users of such amendments.

An Authorised Virtual Currency Trading Facility must have procedures in place to ensure that its Rules are monitored and enforced.

Admission of Virtual Currencies to trading 6.3.1. Admission to Trading Rules

An Authorised Virtual Currency Trading Facility must make clear and transparent rules concerning the admission of Virtual Currencies to trading on its facilities.

The rules of the Authorised Virtual Currency Trading Facility must ensure that:

Virtual Currencies admitted to trading on an Authorised Virtual Currency Trading Facility’s facilities are capable of being traded in a fair, orderly and efficient manner; and

Virtual Currencies admitted to trading on an Authorised Virtual Currency Trading Facility’s facilities are freely negotiable.

Application for admission of Virtual Currencies to Trading

Applications for the admission of Virtual Currencies to trading must be made to the AFSA by an Authorised Virtual Currency Trading Facility.

Applications for the admission of Virtual Currencies to trading can be made to an Authorised Virtual Currency Trading Facility by the issuer of the Virtual Currencies, by a third party on behalf of and with the consent of the issuer of the Virtual Currencies, or by members of an Authorised Virtual Currency Trading Facility.

An Authorised Virtual Currency Trading Facility must, before admitting any Virtual Currencies to trading:

be satisfied that the applicable requirements, including those in its Admission to Trading Rules, have been or will be fully complied with in respect of those Virtual Currencies; and

obtain approval of the AFSA in respect of those Virtual Currencies

For the purposes of (2), an Authorised Virtual Currency Trading Facility must notify an applicant in writing of its decision in relation to the application for admission of Virtual Currencies to trading.

Subject to (2)(b), an Authorised Virtual Currency Trading Facility must provide the AFSA the following information:

a copy of the admission application; and

any information requested by the AFSA.

AFSA objection to admission of Virtual Currencies to trading

Where an Authorised Person Operating a Virtual Currency Business applies for approval of admission or grant admission of Virtual Currencies to trading, the AFSA may:

object to the admission of Virtual Currencies to trading; or

impose conditions or restrictions in respect of the admission of Virtual Currencies to trading, or vary or withdraw such conditions or restrictions, in the circumstances specified in (2).

The AFSA may exercise its powers under (1) where the AFSA reasonably considers that:

granting the Virtual Currencies admission to trading of Virtual Currencies would be detrimental to the interests of Persons dealing in the relevant Virtual Currencies using the facilities of an Authorised Person Operating a Virtual Currency Business or otherwise; or

 any requirements imposed by the AFSA or in the DATF Operator’s Rules

as are applicable have not been or will not be complied with; or

the Issuer of the Virtual Currencies has failed or will fail to comply with any obligations applying to it including those relating to having its Virtual Currencies admitted to trading or listed or traded in another jurisdiction.

Where the AFSA objects to the admission of Virtual Currencies to trading pursuant to (2), such Virtual Currencies must not be admitted by an Authorised Person Operating a Virtual Currency Business to its facility.

Where the AFSA imposes conditions or restrictions on the admission of Virtual Currencies to trading, such Virtual Currencies must not be admitted by an Authorised Person Operating a Virtual Currency Business to its facility unless there is compliance with those conditions and restrictions.

Undertaking to comply with AIFC laws An Authorised Virtual Currency Trading Facility may not admit Virtual Currencies to trading unless the person who seeks to have Virtual Currencies admitted to trading:

gives an enforceable undertaking to the AFSA to submit unconditionally to the jurisdiction of the AIFC in relation to any matters which arise out of or which relate to its use of the facilities of the Authorised Market Institution;

agrees in writing to submit unconditionally to the jurisdiction of the AIFC Courts in relation to any disputes, or other proceedings in the AIFC, which arise out of or relate to its use of the facilities of the Authorised Market Institution; and

agrees in writing to subject itself to the AIFC laws in relation to its use of the facilities of the Authorised Market Institution.

Review of compliance

The Authorised Virtual Currency Trading Facility must maintain arrangements regularly to review whether the Virtual Currencies admitted to trading on its facilities comply with the Admission to Trading Rules.

Suspending or removing Virtual Currencies from trading 6.4.1. Power to suspend

The rules of an Authorised Virtual Currency Trading Facility must provide that the Authorised Virtual Currency Trading Facility have the power to suspend or remove from trading on its facilities any Virtual Currencies with immediate effect or from such date and time as may be specified where it is satisfied that there are circumstances that warrant such action or it is in the interests of the AIFC.

The AFSA may direct an Authorised Person Operating a Virtual Currency Business to suspend or remove Virtual Currencies from trading with immediate effect or from such date and time as may be specified if it is satisfied there are circumstances that warrant such action or it is in the interests of the AIFC.

The AFSA may withdraw a direction made under (2) at any time.

Virtual Currencies that are suspended from trading of Virtual Currencies remain admitted to trading for the purposes of this Chapter.

The AFSA may prescribe any additional requirements or procedures relating to the delisting or suspension of Virtual Currencies from or restoration of Virtual Currencies to trading.

Limitation on power to suspend or remove Virtual Currencies from trading

An Authorised Virtual Currency Trading Facility may not suspend or remove from trading on its facilities any Virtual Currency which no longer complies with its rules, where such step would be likely to cause significant damage to the interests of investors or the orderly functioning of the financial markets

Publication of decision

Where the Authorised Virtual Currency Trading Facility suspends or removes any Virtual Currency from trading on its facilities, it must notify the AFSA and make that decision public.

Where the Authorised Virtual Currency Trading Facility lifts a suspension or re-admits any Virtual Currency to trading on its facilities, it must notify the AFSA and make that decision public.

Where an Authorised Virtual Currency Trading Facility has made any decisions on admission, suspension, or removal of Virtual Currencies from trading on its facilities, it must have adequate procedures for notifying users of such decisions.

Transparency obligations

Trading transparency obligation

An Authorised Virtual Currency Trading Facility must make available to the public:

the current bid and offer prices of Virtual Currencies traded on its systems on a continuous basis during normal trading hours; and

the price, volume and time of the transactions executed in respect of Virtual Currencies traded on its facilities in as close to real-time as technically possible.

Public notice of suspended or terminated Membership

The Authorised Virtual Currency Trading Facility must issue a public notice on its website in respect of any Member that has a Licence to carry on the Market or Regulated Activities whose Membership is suspended or terminated.

Cooperation with office-holder

The Authorised Virtual Currency Trading Facility must cooperate, by the sharing of information and otherwise, with the AFSA, any relevant office-holder and any other authority or body having responsibility for any matter arising out of, or connected with, the default of a Member of the Virtual Currency Trading Facility.

Additional requirements on technology resources 6.6.1. Cyber-security policy

An Authorised Virtual Currency Trading Facility shall implement a written cyber security policy setting forth its policies and procedures for the protection of its electronic systems and members and counterparty data stored on those systems, which shall be reviewed and approved by the Authorised Virtual Currency Trading Facility’s governing body at least annually.

The cyber security policy must, as a minimum, address the following areas:

information security;

data governance and classification;

access controls;

business continuity and disaster recovery planning and resources;

capacity and performance planning;

systems operations and availability concerns;

systems and network security;

systems and application development and quality assurance;

physical security and environmental controls;

customer data privacy;

vendor and third-party service provider management; and

incident response.

Technology Governance

An Authorised Virtual Currency Trading Facility must, as a minimum, have in place systems and controls with respect to the procedures describing the creation, management and controls of digital wallets and private keys.

Trading controls

An Authorised Virtual Currency Trading Facility must be able to:

reject orders that exceed its pre-determined volume and price thresholds, or that are clearly erroneous;

temporarily halt or constrain trading on its facilities if necessary or desirable to maintain an orderly market; and cancel, vary, or correct any order resulting from an erroneous order entry and/or the malfunctioning of the system of a Member.

Settlement and Clearing facilitation services

An Authorised Virtual Currency Trading Facility must ensure that satisfactory arrangements are made for securing the timely discharge (whether by performance, compromise or otherwise), Clearing and settlement of the rights and liabilities of the parties to transactions effected on the An Authorised Virtual Currency Trading Facility (being rights and liabilities in relation to those transactions)

An Authorised Virtual Currency Trading Facility acting as a Virtual Currency Depository must:

have appropriate rules, procedures, and controls, including robust accounting practices, to safeguard the rights of Virtual Currencies issuers and holders, prevent the unauthorised creation or deletion of Virtual Currencies, and conduct periodic and at least daily reconciliation of Virtual Currencies issues it maintains;

prohibit overdrafts and debit balances in Virtual Currencies accounts;

maintain Virtual Currencies in an immobilised or dematerialised form for their transfer by book entry;

protect assets against custody risk through appropriate rules and procedures consistent with its legal framework;

ensure segregation between the Virtual Currency Depository’s own assets and the Virtual Currencies of its participants and segregation among the Virtual Currencies of participants; and identify, measure, monitor, and manage its risks from other activities that it may perform.

Amendments to the AIFC COB (Annex 4)

AIFC CONDUCT OF BUSINESSRULES (COB)

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8.3.14. Client reporting

In relation to each Client for whom it receives or holds Client Investments, anAuthorised Firm must provide at least once a year an auditedstatement of the Client Investments unless such a statement has been provided in a periodic statementin accordance with COB 9.

An Authorised Person which Provides Custody for safeguarding and administering Virtual Currencies belonging to a Retail Client must send a statement to its Retail Clients at least monthly.

8.3.16. Reconciliations

AnAuthorised Firm must:

atleast once every calendar month, reconcile its records of Client Accountsheld with Third Party AccountProviders with monthlystatements received from those Third Party AccountProviders;

at least every six months, count all Client Investments physically held by the Authorised Firm, or its Nominee Company, and reconcile the result of that count to the records of the Authorised Firm; and

atleast every six months, reconcileindividual Client ledgerbalances with the Authorised Firm’s recordsof Client Investment balances held in Client Accounts.

An Authorised Firm must ensure that the process of reconciliation does not give rise to a conflict of interest.

For the purposes of Authorised Persons that are Providing Custody for safeguarding and administering Virtual Currencies belonging to another Person, all reconciliations required under 8.3.16 shall be conducted at least every week.

OPERATORS OF A VIRTUAL CURRENCY BUSINESS

Application

This chapter applies to an Authorised Person engaged in the activity of Operating a Virtual Currency Business.

17.2 Rules Applicable to an Authorised Virtual Currency Trading Facility

In addition to all requirements applicable to Authorised Persons in these rules, GEN, and AML, an Authorised Person carrying on the Market Activity of Operatinga Virtual Currency Trading Facility must comply with the applicable requirements set out in the AMI, unless the requirements in this chapter expressly provide otherwise.

Admission of Virtual Currencies to trading

An Authorised Person Operating a Virtual Currency Trading Facility may grantadmission of Virtual Currencies to trading only where it is satisfied that such admission is in accordance with AMI and an Authorised Virtual Currency Trading Facility’s Admission to Trading Rules.

An Authorised Person Operating a Virtual Currency Trading Facility must not permit trading of Virtual Currencies on its facilities unless those Virtual Currencies are admitted to, and not suspended from, trading by the an Authorised Person Operating a Virtual Currency Trading Facility and approved by the AFSA except where otherwise prescribed in the Rules.

Additional disclosure requirements

Prior to entering into an initial transaction for, on behalf of, or with a Client, an Authorised Person Operating a Virtual Currency Business shall disclose in a clear,fair and not misleading manner:

all terms, conditions and risks relating to the Virtual Currencies that have been admitted to trading and/or is the subject of the transaction;

all material risks associated with its products, services and activities; and

all details on the amount and the purpose of any premiums, fees, charges or taxes payable by the Client, whether or not these are payable to the Operating a Virtual Currency Business.

The risks to be disclosed pursuant to Rule 17.4. include, but are not limitedto, the following:

Virtual Currencies not being legal tender or backed by a government;

the value, or process for valuation, of Virtual Currencies, including the risk of a Virtual Currency having no value;

the volatility and unpredictability of the price of Virtual Currencies relative to Real (Fiat) Currencies;

that trading in Virtual Currencies is susceptible to irrational market forces;

that the nature of Virtual Currencies may lead to an increased risk of Financial Crime;

that the nature of Virtual Currencies may lead to an increased risk of cyber- attack;

there being limited or, in some cases, no mechanism for the recovery of lost or stolen Virtual Currencies;

the risks of Virtual Currencies with regard to anonymity, irreversibility of transactions, accidental transactions, transaction recording, and settlement;

that there is no assurance that a Person who accepts a Virtual Currencies as payment today will continue to do so in the future;

that the nature of Virtual Currencies means that technological difficulties experienced by the Authorised Person may prevent the access or use of a Client’s Virtual Currencies;

any links to Virtual Currencies related activity outside AIFC, which may be unregulated or subject to limited regulation; and

any regulatory changes or actions by the AFSA or Non-AIFC Regulator that may adversely affect the use, transfer, exchange, and value of a Virtual Currency.

Complaints

An Authorised Person Operating a Virtual Currency Business shall establish and maintain written policies and procedures to fairly and timely resolve complaints.

An Authorised Person Operating a Virtual Currency Business must provide, ina clear and conspicuous manner, on its website or websites, in all physical locations, and in any other location as the AFSA may prescribe, the following disclosures:

the mailing address, email address, and telephone number for the receipt of complaints;

a statement that the complainant may also bring his or her complaint to the attention of the AFSA;

the AFSA’s mailing address, website, and telephone number; and

such other information as the AFSA may require.

An Authorised Person Operating a Virtual Currency Business shall report to the AFSA any change in its complaint policies or procedures within ten days.

An Authorised Person Operating a Virtual Currency Business must maintain a record of any complaint made against it for a minimum period of six years from the date of receipt of the complaint

Obligation to report transactions

An Authorised Person Operating a Virtual Currency Business shall report to the AFSA details of transactions in Virtual Currencies traded on its facility which are executed, or reported, through its systems.

The AFSA may make Rules specifying—

the information to be included in reports made under subsection (1); and

the manner in which such reports are to be made.

AFSA power to impose a prohibition or requirement

The AFSA may prohibit an Authorised Person Operating a Virtual Currency Business from: entering into certain specified transactions or types of transactions; or outsourcing any of its functions or activities to a third party.

The AFSA may, by written notice or Guidance set fees payable by an Authorised Person Operating a Virtual Currency Business to the AFSA on certain specified transactions or types of transactions.

Amendments to the AIFC MAR (Annex 5)

AIFC MARKETS RULES (MAR)

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OFFER OF SECURITIES

Offer of Securities

1.1.2 Conditions for the offer of Securities by way of placement

An Authorised Firm issuer may not offer Securities by way of placement in or from the AIFC, and an Authorised Firm may not conduct, facilitate or participate in such as offer, unless:

the offer is made to or directed at only Professional Clients;or

the offer is directed at fewer than 50 Retail Clients in any 12 month period; or

the offer is addressed to investors who acquire Securities for a total consideration of at least $100,000 (or an equivalent amount in another currency) per Person for each separate offer; or

the offer is denominated in amounts of at least $100,000 per unit (or an equivalent amount in another currency); or

the total aggregate consideration for the Securities offered is less than

$100,000, or an equivalent amount in another currency, calculated over a period of 12 months; or

the Securities offered are Shares which are issued in substitution for Shares of the same class as already issued, where the issue of the new Shares does not involve any increase in the issued Share capital; or

the Securities offered are convertibles issued under a Prospectus to existing members or creditors of the Issuer or a member of its Group and there is no additional consideration to be paid; or

the Securities offered are offered in connection with a Takeover and an informational document is made available which is considered by the AFSA as being equivalent to that of a Prospectus; or

the Securities offered are offered, allotted or to be allotted in connection with a merger if an informational document is available which is regarded by the AFSA as being equivalent to that of a Prospectus; or

the Securities offered are offered, allotted or to be allotted in connection with a rights issue where:

the Securities are of a class subject to Reporting Entity disclosure; and

a document is made available containing information on the number and nature of the Securities including rights attaching to those Securities and the reasons for and details of the offer; or

the Securities offered are Shares which are offered, allotted or to be allotted to existing Shareholders free of charge or dividends paid out in the form of Shares of the same class as the Shares in respect of which the dividends are paid, and a document is made available containing information on the number and nature of the Shares and the reasons for and details of the offer; or

the Securities offered are offered, allotted or to be allotted to an existing or former Director or Employee, or any close relative of such a Director or Employee, of the Issuer or a member of the same Group as the Issuer and:

the Issuer or the member of the Group already has its Securities admitted to trading on a Regulated Exchange; and

a document is made available to the offerees containing information on the number and nature of the Securities and the reasons for and details of the Offer; or

the offer meets all of the following conditions:

the total aggregate consideration for the offer of Securities is not more than $5 million, or an equivalent amount in another currency, calculated over a period of 12 months; and

the offer is made to and directed at investors who are:

Professional Clients; and

a Retail Client, provided that the aggregate amount sold to such Clients, including any amount sold in reliance on the exemption provided under this sub-paragraph during the 12-month period preceding the date of such transaction, does not exceed the greater of $2,000 or 10 percent of the annual income or 5 percent of net worth of such Client (excluding the value of the primary residence), whichever is lesser, but not to exceed a maximum aggregate amount sold of $100,000; or

there is a Prospectus in relation to the relevant Securities that satisfies the requirements of this Part and has been approved by the AFSA.


The following requirements apply to an offer of Securities by way of placement conducted under sub-sections (1)(a) through (1)(m) of MAR 1.1.2:

the issuer shall make available to each Client at a reasonable time prior to the purchase of securities the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the issuer possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished under this section;

the issuer shall take reasonable steps to verify the status of the Clients;

the issuer shall, if Retail Clients are participating in the offering, give any Retail Client disclosure documents that contain the necessary information which is material to an investor for making an informed investment decision; and

the issuer shall file a notice with the AFSA within 30 days after the sale of securities in the offering.

Neither the issuer nor any person acting on its behalf shall offer or sell the Securities by any form of general solicitation or general advertising, including, but not limited to, the following:

any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, and

any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

For the purposes of (3), the advertisement made on the issuer’s or Authorised

 Firm’s website is not considered as general solicitation or general advertising.

Amendments to the AIFC GLO (Annex 6)

AFSA GLOSSARY

In this Appendix, a blue font and underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.

Defined Terms

Definitions

Virtual Currency

A digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, and can be exchanged back-and-forth for Real (Fiat) Currency, but does not have legal tender status in any jurisdiction. It is neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the Virtual Currency, and distinguished from Real (Fiat) Currency and E-money.

Centralised Virtual Currencies

Virtual Currency issued by a single or several administrating authorities that establish the rules for its use, maintain a central payment ledger, and have authority to redeem the Currency (withdraw it from circulation).

Decentralised Virtual Currencies

Virtual Currency that have no central administrating authority, and no central monitoring or oversight, and give rise to no claims on their issuer.

Real (Fiat) Currency

Government issued currency that is designated as legal tender in its country of issuance through government decree, regulation or law.

E-currency (or E-money)

A digital representation of Real (Fiat) Currency used to electronically transfer value denominated in Real (Fiat) Currency.

Digital wallet (or E-wallet)

A means (software application, electronic device or other mechanism/medium) for holding, storing and transferring Virtual Currency, E-money and/or other assets, investments.

Cold Digital wallet

A Digital wallet that is stored in a platform (device) that is not connected to the Internet.

Hot Digital wallet

A Digital wallet that is stored in a platform (software application) that is connected to the Internet.

Smart-Contract

A contract whose terms are encoded into a computer program that self-executes and self-


enforces the terms automatically without the need for intermediaries.

Operating a Virtual Currency Business

Operating of a Virtual Currency Trading Facility or Providing Custody for safeguarding and administering Virtual Currencies belonging to another Person, or both.

Operating a Virtual Currency Trading Facility

Operating a facility which functions regularly and brings together multiple third party (whether as principal or agent) –

(a)buying, selling or exchanging Virtual Currencies for a Real (Fiat) Currency, and/or

(b)exchanging one Virtual Currency to another Virtual Currency,

in its facility and in accordance with its non- discretionary rules – in a way that results in a contract.

Providing Custody

Means one or more of the following activities –

(a)safeguarding and administering Investments belonging to another Person;

(b)in the case of a Fund, safeguarding and administering Fund Property; or

(c)safeguarding    and    administering        Virtual Currencies belonging to another Person.

Providing Transaction Services for Decentralised Virtual Currencies

Operating a facility that functions regularly to validate and add transaction records to the ledger of all transactions.

Transaction Services for Decentralised Virtual Currencies

(also known as Mining)

Validation and adding transactions made with a Decentralised Virtual Currencies to the ledger of all transactions.

Investment

A Security, Unit, Derivative or a Virtual Currency and a right or interest in the relevant Security, Unit, Derivative or Virtual Currency.



*Consultation paper No.12. Amendments to the AIFC Companies Regulations

Consultation Paper No.6 on Private Placement Regimes

1. Introduction

1. The Astana Financial Services Authority (“AFSA”) has issued this Consultation Paper to invite public feedback and comments on the proposed amendments to the Astana International Financial Centre (“AIFC”) Companies Regulations on providing exemption to Private Companies relating to offer Securities by the way of private placement.

2. The proposed amendments are set out in Annex A to this Paper.

3. This Consultation Paper may be of interest to individuals, legal entities, financial organisations and investors who are interested in doing business in the AIFC.

4. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper No 6” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments.

5. The AFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

6. The deadline for providing comments on the proposals is 20 July 2018. Once we receive your comments, we shall consider if any refinements are required to the proposed amendments.

7. Comments to be addressed to:

Consultation Paper No 6 Innovation Policy Division

Astana Financial Services Authority (AFSA)

8 Kunayev Street, Building B, Astana, Kazakhstan or emailed to: Fintech.Consultation@afsa.kz

Tel: +7 (7172) 647260


2. Background

1. On May 25, 2018, issued his Consultation Paper #4 to invite public feedback and comments on the proposed amendments to the Astana International Financial Centre (“AIFC”) Regulations and Rules on regulation of Virtual Currencies, facilities offering trading of Virtual Currencies, and regimes for alternative sources of funding for businesses (“Proposed Framework”).

2. The Proposed Framework involves amendments to the AIFC’s legislation to extend the current exempt offering regime for the offer of Securities by way of placement. The current edition of the AIFC Companies Regulation does not allow Private Companies to use these regimes.

3. Therefore, the AFSA is proposing amendments to the AIFC Companies Regulations on providing exemptions to Private Companies relating to offer Securities by the way of private placement.

3. Annex A

AIFC COMPANIES REGULATIONS

In this Appendix, a blue font and underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.


PART 7: PRIVATE COMPANIES AND PUBLIC COMPANIES

CHAPTER 4–PROHIBITION OF PUBLIC OFFERS BY PRIVATE COMPANIES

50. Prohibition of public offers by Private Companies

(1) A Private Company must not:

(a) make an offer of its Securities to the public; or

(b) allot or agree to allot its Securities to any Person with a view to the Securities being offered to the public.

(3) A Private Company does not Contravene subsection (1) if it:

(a) acts in good faith under arrangements under which it is to re-register as a Public Company before the Securities are allotted; or

(b) undertakes, as part of the terms of the offer, to re-register as a Public Company within 6 months after the day the offer is first made, and the undertaking is complied with.; or

(c) offers Securities by way of placement as provided in Rules made by the AFSA.

Consultation Paper No.7 on Financial Services Exempt from Corporate Income Tax

1. Introduction

1. The Astana Financial Services Authority (“AFSA”) has issued this Consultation Paper to invite public feedback and comments on the proposed amendments to the Order of The Governor of the AIFC on Financial Services Exempt from Corporate Income Tax on providing relief from corporate income tax for Participants of the AIFC Fintech Regulatory Sandbox (“the Sandbox”).

2. The proposed amendments are set out in Annex A to this Paper.

3. This Consultation Paper may be of interest to individuals, legal entities, financial technology firms, investors and consulting firms who are interested in doing business in the AIFC and the Sandbox.

4. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper No 7” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments.

5. The AFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

6. The deadline for providing comments on the proposals is 28 July 2018. Once we receive your comments, we shall consider if any refinements are required to the proposed amendments.

7. Comments to be addressed to:

Consultation Paper No 7 Innovation Policy Division

Astana Financial Services Authority (AFSA)

8 Kunayev Street, Building B, Astana, Kazakhstan or emailed to: Fintech.Consultation@afsa.kz

Tel: +7 (7172) 647260

2. Background

1. In accordance to the latest changes to the Constitutional Statute of the Republic of Kazakhstan “On the Astana International Financial Center”, the development of financial technologies (“FinTech”) and innovation projects are one of the key pillars of the AIFC.

2. As part of development of financial technologies in the AIFC, the Astana Financial Services Authority (“AFSA”) deployed the FinTech Regulatory Sandbox, a framework that allows FinTech startups and other innovators to conduct live experiments in a controlled environment under a regulator's supervision.

3. The AIFC is positioned as a jurisdiction with tax free regimes for financial service providers. Given that the Sandbox is designed for firms that are looking to apply technology in an innovative way to provide financial services that are or likely to be regulated by AFSA, it is proposed to provide relief from corporate income tax for Participants of the Sandbox.

3. Annex A

ORDER OF THE GOVERNOR OF THE AIFC ON FINANCIAL SERVICES EXEMPT FROM CORPORATE INCOME TAX

In this Appendix, a blue font and underlining indicates new text and strikethrough indicates deleted text, unless otherwise indicated.


Order of the Governor of the Astana International Financial Centre on Financial Services Exempt from Corporate Income Tax


In accordance with subparagraph 5 of paragraph 3 of article 6 of the Constitutional Statute of the Republic of Kazakhstan On the Astana International Financial Centre and paragraph 9 of article 3 of The Structure of the Bodies of the Astana International Financial Centre, adopted by the Resolution of the Management Council on May 26, 2016 No. 20-27/1814, as amended by the Resolution of the Management Council, the Amendments and Supplementations to the Structure of the Bodies of the Astana International Financial Centre, adopted on October 9, 2017 No. 17-61-6.2, the Governor of the Astana International Financial Centre (AIFC) ORDERS:

1. In the event a Centre Participant carries on any service specified in Schedule 1, the Centre Participant shall not be liable for corporate income tax imposed by the Tax Code of the Republic of Kazakhstan on income or capital resulting from that

service provided the service is carried on in full compliance with the AIFC Regulations and Rules.

2. The list of financial services that are exempt from corporate income tax is specified in Schedule 1 hereof.

3. This order comes into effect from the date of its signing.


AIFC Governor К. Kelimbetov


Schedule 1: The List of Financial Services that are Exempt from Corporate Income Tax

(a) A Regulated Activity listed in Schedule 1 of the AIFC General Rules (GEN).

(b) A Market Activity listed in Schedule 3 of the AIFC Financial Services Framework Regulations (FSFR).

(c) A financial services activity specified in an AIFC FinTech Regulatory Sandbox Permission issued pursuant to the AIFC FinTech Regulatory Sandbox Guidance.

Consultation paper No.0009. Introduction of an option for Private Companies and Partnership to keep information in the Register kept by the Registrar.

Introduction

1. The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed amendments to the AIFC Regulations and Rules which aim at updating and modernising the legal framework to meet the current needs of business and provide the flexibility needed for companies to operate in an evolving business environment

2. The proposals in this Consultation Paper will be of interest to current and potential AIFC Participants who are interested in doing business in the AIFC.

3. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P-CE-2019-0009” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including onits website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4. The deadline for providing comments on the proposals is 25 October 2019. Once we receive your comments, we shall consider if any refinements are required to the proposals.

5. Comments to be addressed by: post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El avenue, block C3.2, Nur-Sultan, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +7 7172 613626


6. The remainder of this Consultation Paper contains the following:

(a) background to the proposals;

(b) the key element of the proposed amendments;

(c) Annex 1: Draft of proposed amendments to AIFC Regulations;

(d) Annex 2: Draft of proposed amendments to AIFC Rules.

Background

The Astana Financial Services Authority ("AFSA") proposes to make amendments to the AIFC Acts which aim at updating and modernising the legal framework to meet the current needs of business and provide the flexibility needed for companies to operate in an evolving business environment. Additionally, the proposed amendments aim to make a positive contribution to the AIFC Development Strategy, in particular by improving the ease of doing business.

The key aspect of the proposal is to introduce an option for Private Companies and partnerships to keep information in the Register kept by the Registrar rather than in their own statutory books. The election of this option will decrease the administrative burden on the AIFC Participants. The relevant registers include the: register of Shareholders, register of Directors and Secretaries (if applicable), register of ultimate beneficial owners (UBOs), register of Partners, and the register of Members. This is modelled based on the practice of the United Kingdom.

It is proposed to amend each of the following AIFC Acts:

1) AIFC Companies Regulations

2) AIFC Limited Partnership Regulations

3) AIFC Companies Rules

4) AIFC General Partnership Rules

5) AIFC Limited Liability Partnership Rules

6) AIFC Fees Rules

KEY ELEMENT OF THE PROPOSED AMENDMENTS

The key aspects of the proposal is to introduce an option for Private Companies and partnerships to keep information in the Register kept by the Registrar rather than in their own statutory books. The election of this option will decrease the administrative burden on the AIFC Participants. The relevant registers include the: register of Shareholders, register of Directors and Secretaries (if applicable), register of ultimate beneficial owners (UBOs), register of Partners, and the register of Members. This is modelled based on the practice of the United Kingdom.

Question

Do you have any concerns related to the proposed amendments to AIFC Rules and Regulations? If so, what are they, and how should they be addressed?

Annex 1

Proposed amendments to AIFC Regulations

Chapter Number/Section Number


Current version


Proposed version

AIFC Companies Regulations

CHAPTER 5– REGISTERS OF SHAREHOLDE RS AND DEBT SECURITY HOLDERS AND SHARE CERTIFICATES


Section 52

52. Register of Shareholders


(1) A Company must establish and maintain a Register of Shareholders.


(2) The Company must promptly enter the following in the Register of Shareholders:


(a) the names and addresses of its Shareholders, together with a statement of the Shares held

by each Shareholder, distinguishing each Share by its number (if the Share has a number)

and, if the Company has 2 or more classes of issued Shares, by its class;


(b) the date each Shareholder was registered as a Shareholder;

52. Register of Shareholders


(1) A Company must establish and maintain a Register of Shareholders, unless the Register is kept by the Registrar for the Private Company under subsection (4).


(2) The Company must promptly enter the following in the Register of Shareholders:


(a) the names and addresses of its Shareholders, together with a statement of the Shares held

by each Shareholder, distinguishing each Share by its number (if the Share has a number)

and, if the Company has 2 or more classes of issued Shares, by its class;



(c) the date any Person ceased to be a Shareholder;

(b) the date each Shareholder was registered as a Shareholder;



(d) the date the number of Shares held by any Shareholder increased or decreased;

(c) the date any Person ceased to be a Shareholder;



(e) for Shares that are not fully paid—the amount remaining unpaid on each Share;

(d) the date the number of Shares held by any Shareholder increased or decreased;



(f) for joint holders of Shares in a Company—unless otherwise provided in its Articles of

Association, the following:

(i) the names of each joint holder;

(ii) the nominee Shareholder for the purposes of voting;

(iii)a nominated single address to which

all communications required to be sent to a

(e) for Shares that are not fully paid—the amount remaining unpaid on each Share;


(f) for joint holders of Shares in a Company— unless otherwise provided in its Articles of Association, the following:

(i) the names of each joint holder;

(ii) the nominee Shareholder for the purposes of voting;

(iii) a nominated single address to which all communications required to be sent to a


Shareholder can be sent.


(3) Contravention of this section is punishable by a fine

Shareholder can be sent.


(3) Contravention of this subsections (1) and

(2) is punishable by a fine


(4) A Private Company may make elect to keep information on the Register kept by the Registrar.


(5) An election may be made under this section by:

(a) the applicant wishing to incorporate a Private Company under these Regulations; or

(b) the Private Company itself once it is incorporated.

(6) In paragraph (b) of subsection (5), the election is of no effect, without prior agreement of all the Shareholders of the Private Company at the particular time to the making of the election.

(7) An election under this section is made by giving notice of election to the Registrar.

(8) If the notice is given by Person(s) wishing to incorporate a Private Company:

(a) it must be given together with the application for the incorporation under section 13; and


(b) it must be accompanied by a statement containing all the information under subsection (2).


(9) If the notice is given by the Private Company, it must be accompanied by:


(a) a statement by the Private Company that all the Shareholders of the Private Company have assented to the making of the election; and


(b) a statement containing all the information that is required under subsection (2) to be contained in the Private Company's register of Shareholders as at the date of the notice in respect of matters that are current as at that date.


(10)An election made under subsection (4) takes effect when the notice of election is registered by theRegistrar.


(11)The election remains in force until either:



(a) the Private Company ceases to be a Private Company; or


(b) a notice of withdrawal sent by the Private Company under subsection (14) is registered by the Registrar, whichever occurs first.


(12) A Private Company must continue to keep a register of Shareholders in accordance with subsection (2) containing all the information that was required to be stated in that Register as at the time immediately before the election took effect, but the Private Company does not have to update that Register to reflect any changes that occur after that time.


(13)The date to be recorded in the Register kept by the Registrar is to be the date on which the document containing that information is registered by the Registrar.


(14)A Private Company must deliver to the Registrar any information under subsection (2) that the Private Company would during the period when an election under subsection (4) is in force, have been obliged under these regulations to enter in its Register of Shareholders, as soon as reasonably practicable but within 14 days.


(15) A Private Company may by giving notice of withdrawal to the Registrar withdraw an election made by or in respect of it under subsection (4).


(a)   the withdrawal takes effect when the notice is registered by the Registrar;


(b) the effect of withdrawal is that the Private Company's obligation under subsection (1) to maintain a register of Shareholders applies from then on with respect to the period going forward.


(c) the Private Company must place a note in its register ofShareholders—

(i) stating that the election under subsection (4) has been withdrawn,

(ii)recording when that withdrawal took effect, and

(iii)indicating that information about its Shareholders relating to the period

when the election was in force that is no longer current is available for



public inspection on the register kept by the Registrar.


(16) Contravention of subsections (4) to (15) is punishable by a fine.

Section 90

90.      Register of Directors and Secretaries


(1)Every Company must keep, at its registered office, a Register of its Directors and, if applicable, a Register of its Secretaries. The Company must ensure that a register contains the particulars required by the Rules.


(2)If a Company is required to keep a register under subsection (1), the Company must ensure that the register is open to inspection, during business hours and without charge, by the Registrar or any Shareholder or Director of the Company.


(3)The Company may, by its Articles of Association or a decision in General Meeting, impose reasonable restrictions on the availability of a register for inspection under subsection (2), but must nevertheless ensure that the register is open for inspection for at least 2 hours on each day that its registered office is open.


(4)If a Company Fails to make a register available for inspection under subsection (2) by the Registrar or a Shareholder or Director of the Company, the Registrar may, by Written notice given to the Company, direct the Company to immediately make the register available for inspection by that Person. The Company must comply with the direction.


(5)Contravention of this section is punishable by a fine.

90.      Register of Directors and Secretaries


(1)Every Company must keep, at its registered office, a Register of its Directors and, if applicable, a Register of its Secretaries, unless the Register is kept by the Registrar for the Private Company under subsection (6). The Company must ensure that a register contains the particulars required by the Rules.


(2)If a Company is required to keeps a register at its registered office under subsection (1), the Company must ensure that the register is open to inspection, during business hours and without charge, by the Registrar or any Shareholder or Director of the Company.


(3)The Company may, by its Articles of Association or a decision in General Meeting, impose reasonable restrictions on the availability of a register for inspection under subsection (2), but must nevertheless ensure that the register is open for inspection for at least 2 hours on each day that its registered office is open.



(4)If a Company Fails to make a register available for inspection under subsection (2) by the Registrar or a Shareholder or Director of the Company, the Registrar may, by Written notice given to the Company, direct the Company to immediately make the register available for inspection by that Person. The Company must comply with the direction.


(5)Contravention of thissubsections (1) to (4) is punishable by a fine.


(6)  A Private Company may make an election to keep information on the register kept by the Registrar.


(7)An election may be made under this section by:



(a) the applicant wishing to incorporate a Private Company under these Regulations; or

(b) the Private Company itself once it is incorporated.

(8) In paragraph (b) of subsection (7), the election is of no effect, without prior agreement of all the Shareholders of the Private Company at the particular time to the making of the election.

(9) An election under this section is made by giving notice of election to the Registrar.

(10)If the notice is given by Person(s) wishing to incorporate a Private Company:

(a) it must be given together with the application for the incorporation under section 13; and


(b) it must be accompanied by a statement containing all the information prescribed by the Rules.


(11)If the notice is given by the Private Company, it must be accompanied by:


(a) a statement by the Private Company that all the Shareholders of the Private Company have assented to the making of the election; and


(b) a statement containing all the information prescribed by the Rules to be contained in the Private Company's register of Directors and Secretaries as at the date of the notice in respect of matters that are current as at that date.


(13)An election made under subsection (6) takes effect when the notice of election is registered by theRegistrar.


(14)The election remains in force until either:


(a) the Private Company ceases to be a Private Company; or


(b) a notice of withdrawal sent by the Private Company under subsection (18) is registered by the Registrar, whichever occurs first.


(15) A Private Company must continue to keep a register of Directors and Secretaries in accordance with the Rules, containing all the information that was required to be stated in

that register as at the time immediately before



the election took effect, but the Private Company does not have to update that register to reflect any changes that occur after that time.


(16)The date to be recorded in the Register kept by the Registrar is to be the date on which the document containing that information is registered by the Registrar.


(17)A Private Company must deliver to the Registrar any information prescribed by the Rules that the Private Company would during the period when an election under subsection (6) is in force, have been obliged under these regulations to enter in its register of Directors and Secretaries, as soon as reasonably practicable but within 14 days.


(18) A Private Company may by giving notice of withdrawal to the Registrar withdraw an election made by or in respect of it under subsection (6).


(a)the withdrawal takes effect when the notice is registered by the Registrar;


(b) the effect of withdrawal is that the Private Company's obligation under subsection (1) to keep a register of Directors and Secretaries applies from then on with respect to the period going forward.

(c) the Private Company must place a note in its register of Directors or Secretaries—

(i) stating that the election under subsection (6) has been withdrawn,

(ii)recording when that withdrawal took effect, and

(iii)indicating that information about its Directors or Secretaries relating to the period when the election was in force that is no longer current is available for public inspection on the register kept by the Registrar.


(19) Contravention of subsections (6) to (18) is punishable by a fine.

PART 14-1: ULTIMATE BENEFICIAL OWNERS


CHAPTER 2: BENEFICIAL

179-4 Requirements relating to Beneficial Ownership Register


(1) A Relevant Person shall keep and maintain a Beneficial Ownership Register within the time

specified in subsections (3) and (4), in which the UBO Details in respect of each of its

179-4 Requirements relating to Beneficial Ownership Register


(1) A Relevant Person shall keep and maintain a Beneficial Ownership Register within the time

specified in subsections (3) and (4), in which the UBO Details in respect of each of its

OWNERSHIP REGISTER


Section 179-4

Ultimate Beneficial Owners and (if applicable) the information required under section 179-9 (Ownership through the Exempt entity), shall be recorded. The Relevant Person shall record any changes to this information in the Beneficial Ownership Register within thirty (30) days of becoming aware of such change.



(2) The Beneficial Ownership Register shall be kept and maintained at the address of the Relevant

Person's registered office or any other address notified in Writing by the Relevant Person to the Registrar.



(3) Each Relevant Person in existence at the Commencement Date shall establish a Beneficial

Ownership Register within ninety (90) days of such commencement.



(4) Each Relevant Person which comes into existence on or after the Commencement Date shall establish a Beneficial Ownership Register within thirty (30) days of its incorporation or registration.


(5) Subject to section 179-9 (Ownership through the Exempt entity), the Relevant Person shall cause

the following information to be entered in its Beneficial Ownership Register in respect of each

Ultimate Beneficial Owner:

(a) full legal name;

(b) residential address and, if different, an address for service of notices under these Regulations;

(c) date and place of birth;

(d) nationality;

(e) information identifying the Person from their passport or other government-issued national identification document acceptable to the Registrar, including:

(i) identifying number;

(ii)country of issue; and

(iii) date of issue and ofexpiry;

(f) the date on which the Person became an Ultimate Beneficial Owner of the Relevant Person; and

(g) the date on which the Person ceased to be an Ultimate Beneficial Owner of the Relevant

Ultimate Beneficial Owners and (if applicable) the information required under section 179-9 (Ownership through the Exempt entity), shall be recorded. The Relevant Person shall record any changes to this information in the Beneficial Ownership Register within thirty (30) days of becoming aware of such change.


(1-1) If an election was made under subsection (9), to keep the Register by theRegistrar, subsections (1) to (8) shall notapply.


(2) The Beneficial Ownership Register shall be kept and maintained at the address of the Relevant

Person's registered office or any other address notified in Writing by the Relevant Person to the Registrar.


(3) Each Relevant Person in existence at the Commencement Date shall establish a Beneficial

Ownership Register within ninety (90) days of such commencement.


(4) Each Relevant Person which comes into existence on or after the Commencement Date shall establish a Beneficial Ownership Register within thirty (30) days of its incorporation or registration.


(5) Subject to section 179-9 (Ownership through the Exempt entity), the Relevant Person shall cause

the following information to be entered in its Beneficial Ownership Register in respect of each

Ultimate Beneficial Owner:

(a) full legal name;

(b) residential address and, if different, an address for service of notices under these Regulations;

(c) date and place of birth;

(d) nationality;

(e) information identifying the Person from their passport or other government-issued national identification document acceptable to the Registrar, including:

(i) identifying number;

(ii)country of issue; and

(iii) date of issue and ofexpiry;

(f) the date on which the Person became an Ultimate Beneficial Owner of the Relevant Person; and

(g) the date on which the Person ceased to be an Ultimate Beneficial Owner of the Relevant


Person.


(6) If after having exhausted all reasonable means:


(a) no natural person is identified as the Ultimate Beneficial Owner of the Relevant Person;

or

(b) there is reasonable doubt that that any natural person so identified is an Ultimate Beneficial

Owner of the Relevant Person,


the Relevant Person shall enter on its Beneficial Ownership Register, the UBO Details of the natural persons who are deemed to be the Ultimate Beneficial Owners pursuant to section 179-1(6).


(7) If a Relevant Person causes an entry to be made in its Beneficial Ownership Register naming a natural person as an Ultimate Beneficial Owner, and the information and particulars were not provided either by that natural person or with his or her knowledge, the Relevant Person shall within thirty (30) days of making the entry, notify the Person whose name has been included in the Beneficial Ownership Register of that fact.


(8) Contravention of subsection (1) is punishable by a fine.

Person.


(6) If after having exhausted all reasonable means:


(a) no natural person is identified as the Ultimate Beneficial Owner of the Relevant Person;

or

(b) there is reasonable doubt that that any natural person so identified is an Ultimate Beneficial

Owner of the Relevant Person,


the Relevant Person shall enter on its Beneficial Ownership Register, the UBO Details of the natural persons who are deemed to be the Ultimate Beneficial Owners pursuant to section 179-1(6).


(7)If a Relevant Person causes an entry to be made in its Beneficial Ownership Register naming a natural person as an Ultimate Beneficial Owner, and the information and particulars were not provided either by that natural person or with his or her knowledge, the Relevant Person shall within thirty (30) days of making the entry, notify the Person whose name has been included in the Beneficial Ownership Register of that fact.


(8)Contravention of subsection (1) is punishable by a fine.


(9) A Private Company may make an election to keep information on the register kept by the Registrar.


(10)An election may be made under this section by:

(a) the applicant wishing to incorporate a Private Company under these Regulations; or

(b) the Private Company itself once it is incorporated.

(11) In paragraph (b) of subsection (10), the election is of no effect, without prior agreement of all the Shareholders of the Private Company to the making of the election.

(12) An election under this section is made by giving notice of election to the Registrar.

(13) If the notice is given by Person(s) wishing to incorporate a Private Company:



(a) it must be given together with the application for the incorporation under section 13; and


(b) it must be accompanied by a statement containing all the information prescribed by the Rules.


(14)If the notice is given by the Private Company, it must be accompanied by:


(a) a statement by the Private Company that all the Shareholders of the Private Company have assented to the making of the election; and


(b) a statement containing all the information prescribed by the Rules to be contained in the Private Company's Beneficial Ownership Register as at the date of the notice in respect of matters that are current as at that date.


(15)An election made under subsection (9) takes effect when the notice of election is registered by theRegistrar.


(16)The election remains in force until either:


(a) the Private Company ceases to be a Private Company; or

(b) a notice of withdrawal sent by the Private Company under subsection (20) is registered by the Registrar, whichever occurs first.


(17)A Private Company must continue to keep a Beneficial Ownership Register in accordance with the subsection (5) of section 179-4, containing all the information that was required to be stated in that register as at the time immediately before the election took effect, but the Private Company does not have to update that register to reflect any changes that occur after that time.


(18) The date to be recorded in the Register kept by the Registrar is to be the date on which the document containing that information is registered by the Registrar.


(19)A Private Company must deliver to the Registrar any information prescribed by subsection (5) of section 179-4 that the Private Company would during the period when an election under subsection (9) is in force, have been obliged under these

Regulations to enter in its Beneficial



Ownership Register, as soon as reasonably practicable but within 14 days.


(20)A Private Company may by giving notice of withdrawal to the Registrar withdraw an election made by or in respect of it under subsection (9).


(a)   the withdrawal takes effect when the notice is registered by the Registrar;


(b) the effect of withdrawal is that the Private Company's obligation under subsection (1) of section 179-4 to keep and maintain a Beneficial Ownership Register applies from then on with respect to the period going forward.

(c) the Private Company must place a note in its register of Beneficial Ownership—

(i) stating that the election under subsection (9) has been withdrawn,

(ii)recording when that withdrawal took effect, and

(iii) indicating that information about its Beneficial Owners relating to the period when the election was in force that is no longer current is available for public inspection on the register kept by the Registrar.

(21) Contravention of subsections (9) to (20) is punishable by a fine.

Section 179-7 Register of Nominee Directors

179-7 Register of Nominee Directors


(1) A company which has one (1) or more Nominee Directors shall keep and maintain a Register of

Nominee Directors in which there shall be entered, the following information obtained pursuant to

section 179-6(1) (Duty of Nominee Directors) or otherwise known by it, shall be entered in relation

to the Person on whose behalf, each Nominee Director acts:

(a) full legal name;

(b) residential address and, if different, an address for service of notices under these Regulations;

(c) date of birth;

(d) nationality;

(e) information identifying the Person from their passport or other government-issued national identification document acceptable to the Registrar of Companies, including:

(i) identifying number;

(ii)country of issue; and

(iii)date of issue and of expiry,

179-7 Register of Nominee Directors


(1) A company which has one (1) or more Nominee Directors shall keep and maintain a Register of Nominee Directors in which there shall be entered, unless the Register is kept by the Registrar for the Private Company under subsection (3).


(1-1) The following information obtained pursuant to

section 179-6 (1) (Duty of Nominee Directors) or otherwise known by it, shall be entered in relation

to the Person on whose behalf, each Nominee Director acts:

(a) full legal name;

(b) residential address and, if different, an address for service of notices under these Regulations;

(c) date of birth;

(d) nationality;

(e) information identifying the Person from their passport or other government-issued

national identification document acceptable to the Registrar of Companies, including:


and, in respect of each Nominee Director;

(f) the date on which the Nominee Director became a Nominee Director of the Company; and

(g) the date on which the Nominee Director ceased to be a Nominee Director of the Company.


(2) Contravention of subsection (1) is punishable by a fine.

(i) identifying number;

(ii)country of issue; and

(iii)date of issue and of expiry,

and, in respect of each Nominee Director;

(f) the date on which the Nominee Director became a Nominee Director of the Company; and

(g) the date on which the Nominee Director ceased to be a Nominee Director of the Company.


(2) Contravention of subsection (1) is punishable by a fine.


(3) A Private Company may make an election to keep information on the register kept by the Registrar.


(4)An election may be made under this section by:

(a) the applicant wishing to incorporate a Private Company under these Regulations; or

(b) the Private Company itself once it is incorporated.

(5) In paragraph (b) of subsection (4), the election is of no effect, without prior agreement of all the Shareholders of the Private Company to the making of the election.

(6) An election under this section is made by giving notice of election to the Registrar.

(7) If the notice is given by Person(s) wishing to incorporate a Private Company:

(a) it must be given together with the application for the incorporation under section 13; and


(b) it must be accompanied by a statement containing all the information prescribed by the Rules.


(8) If the notice is given by the Private Company, it must be accompanied by:


(a) a statement by the Private Company that all the Shareholders of the Private Company have assented to the making of the election; and


(b)a statement containing all the information prescribed by the Rules to be contained in the Private Company's Register of Nominee Directors as at the date of the notice in respect of matters that

are current as at that date.




(9) An election made under subsection (3) takes effect when the notice of election is registered by the Registrar.


(10)The election remains in force until either:


(a) the Private Company ceases to be a Private Company; or

(b)a notice of withdrawal sent by the Private Company under subsection (14) is registered by the Registrar, whichever occurs first.


(11) A Private Company must continue to keep a Register of Nominee Directors in accordance with the subsection (1) of section 179-7, containing all the information that was required to be stated in that register as at the time immediately before the election took effect, but the Private Company does not have to update that register to reflect any changes that occur after that time.


(12)The date to be recorded in the Register kept by the Registrar is to be the date on which the document containing that information is registered by the Registrar.


(13) A Private Company must deliver to the Registrar any information prescribed by subsection (1-1) of section 179-7 that the Private Company would during the period when an election under subsection (3) is in force, have been obliged under these Regulations to enter in its Register of Nominee Directors, as soon as reasonably practicable but within 14 days.


(14) A Private Company may by giving notice of withdrawal to the Registrar withdraw an election made by or in respect of it under subsection (3).


(a)   the withdrawal takes effect when the notice is registered by the Registrar;


(b) the effect of withdrawal is that the Private Company's obligation under subsection (1) of section 179-7 to keep and maintain a Register of Nominee Directors applies from then on with respect to the period going forward.

(c) the Private Company must place a note in its Register of Nominee Directors

 —



(i) stating that the election under subsection (3) has been withdrawn,

(ii)recording when that withdrawal took effect, and

(iii)indicating that information about its Nominee Directors relating to the period when the election was in force that is no longer current is available for public inspection on the register kept by the Registrar.


(15) Contravention of subsections (3) to (14) is punishable by a fine.

Chapter Number/Section

Number


Current version


Proposed version

AIFC Limited Partnership Regulations

Section 16

16. Limited Partnerships: registered office and conduct of business etc.


(1) A Limited Partnership that conducts any business, purpose or activity in or from the AIFC must,

at all times, have a registered office in the AIFC to which all communications and notices to the

partnership may be addressed.


(2) A Limited Partnership must conduct its principal business, purpose or activity in the AIFC, unless the Registrar of Companies otherwise permits.


(3) A Document may be served on a Limited Partnership by leaving it at, or sending it by post to, the registered office of the Limited Partnership in the AIFC.


(4) The General Partners of a Limited Partnership must keep at the registered office of the partnership in the AIFC:


(a) a register showing the following particulars for each Person who is or has been a Partner,

and kept in alphabetical order of their names:

(i) for an individual—the individual’s full name and address;

(ii)for a body corporate—the body

corporate’s full name, the place where it was

incorporated and the address of its registered or principal office;

(iii) the date each Person was registered as a Partner and whether the Person was registered as a general partner or limited

partner;

16. Limited Partnerships: registered office and conduct of business etc.


(1) A Limited Partnership that conducts any business, purpose or activity in or from the AIFC must, at all times, have a registered office in the AIFC to which all communications and notices to the partnership may be addressed.


(2) A Limited Partnership must conduct its principal business, purpose or activity in the AIFC, unless the Registrar of Companies otherwise permits.


(3) A Document may be served on a Limited Partnership by leaving it at, or sending it by post to, the registered office of the Limited Partnership in the AIFC.


(4) The General Partners of a Limited Partnership must keep at the registered office of the partnership in the AIFC, unless the register is kept by the Registrar under subsection (9):


(a) a register showing the following particulars for each Person who is or has been a Partner,

and kept in alphabetical order of their names:

(i) for an individual—the individual’s full name and address;

(ii)for a body corporate—the body

corporate’s full name, the place where it was

incorporated and the address of its registered or principal office;

(iii)the date each Person was registered as a Partner and whether the Person was


(iv) if the Person has ceased to be a Partner—a statement that the Person has ceased

to be a Partner and the date the Person ceased to be a partner; and

(b) a copy of the partnership’s certificate of registration; and

(c) a copy of the partnership agreement and each amendment made to it; and

(d) a statement of the amounts of any contributions agreed to be made by the Partners and the

time at which, or events on the happening of which, the contributions are to be made; and

(e) a statement of the amounts of money, and nature and value of any other property, contributed by each Partner and the dates the contributions were made; and

(f) anything else required by these Regulations or the Rules.


(5) The General Partners must ensure that Limited Partnership’s Records kept under subsection (4) are

available for inspection, and copying without charge, by a Partner during ordinary business hours

at the request of the Partner.


(6) If any of the details in the Limited

Partnership’s Records kept under subsection

(4) change, the

General Partners must ensure that the Records are updated within 14 days after the day the change

happens.


(7) The information contained in the Records of a Limited Partnership kept under subsection (4) are

taken to be accurate, unless proven otherwise.


(8) Contravention of this section is punishable by a fine.

registered as a general partner or limited partner;

(iv) if the Person has ceased to be a Partner—a statement that the Person has ceased

to be a Partner and the date the Person ceased to be a partner; and


(b)a copy of the partnership’s certificate of registration;and


(c) a copy of the partnership agreement and each amendment made to it; and


(d)a statement of the amounts of any contributions agreed to be made by the Partners and the

time at which, or events on the happening of which, the contributions are to be made; and


(e) a statement of the amounts of money, and nature and value of any other property, contributed by each Partner and the dates the contributions were made; and

(f) anything else required by these Regulations or the Rules.


(5) The General Partners must ensure that Limited Partnership’s Records kept under subsection (4) are

available for inspection, and copying without charge, by a Partner during ordinary business hours

at the request of the Partner.


(6) If any of the details in the Limited

Partnership’s Records kept under subsection

(4) change, the

General Partners must ensure that the Records are updated within 14 days after the day the change

happens.


(7)The information contained in the Records of a Limited Partnership kept under subsection (4) are is

taken to be accurate, unless proven otherwise.


(8)Contravention of this section subsections (1), (2), (4), (5), (6) and (7) is punishable by a fine.


(9)A Limited Partnership may make an election to keep information on the Register kept by the Registrar.


(10) An election may be made under this section by:



(a) the applicant wishing to incorporate a Limited Partnership under these Regulations; or

(b) the Limited Partnership itself once it is incorporated.

(11) In paragraph (b) of subsection (10), the election is of no effect, without prior agreement of all the Partners of the Limited Partnership to the making of the election.



(12)  An election under this section is made by giving notice of election to the Registrar.

(13) If the notice is given by Persons wishing to register a Limited Partnership:

(a) it must be given together with the application for registration under section 12; and


(b) it must be accompanied by a statement containing all the information under subsection (4).


(14) If the notice is given by the Limited Partnership, it must be accompanied by:


(a) a statement by the Limited Partnership that all the Partners of the Limited Partnership have assented to the making of the election; and


(b) a statement containing all the information that is required under subsection (4) to be contained in the Limited Partnership's register of Partners as at the date of the notice in respect of matters that are current as at that date.


(15) An election made under subsection (9) takes effect when the notice of election is registered by the Registrar.



(16) The election remains in force until either:


(a) the Limited Partnership ceases to be a Limited Partnership; or


(b) a notice of withdrawal sent by the Limited Partnership under subsection (20) is registered by the Registrar, whichever occurs first.


(17)A Limited Partnership must continue to keep a register of Partners in accordance with subsection (4) containing all the information

that was required to be stated in that Register



as at the time immediately before the election took effect, but the Limited Partnership does not have to update that Register to reflect any changes that occur after that time.


(18)The date to be recorded in the Register kept by the Registrar is to be the date on which the document containing that information is registered by the Registrar.


(19)A Limited Partnership must deliver to the Registrar any information under subsection (4) that the Limited Partnership would during the period when an election under subsection (9) is in force, have been obliged under these regulations to enter in its register of Partners, as soon as reasonably practicable but within 14 days.


(20)A Limited Partnership may by giving notice of withdrawal to the Registrar withdraw an election made by or in respect of it under subsection (9).


(a)   the withdrawal takes effect when the notice is registered by the Registrar;


(b) the effect of withdrawal is that the Limited Partnership's obligation under subsection (4) to maintain a register of Partners applies from then on with respect to the period going forward.


(c) the A Limited Partnership must place a note in its register of Partners —

(i) stating that the election under subsection (9) has been withdrawn,

(ii)recording when that withdrawal took effect, and

(iii)indicating that information about its Partners relating to the period when the election was in force that is no longer current is available for public inspection on the register kept by the Registrar.



(21) Contravention of sections (9) to (20) is punishable by a fine.

Annex 2

Proposed amendments to AIFC Rules

Chapter Number/Section

Number


Current version


Proposed version

AIFC Companies Rules

PART 4: PRIVATE COMPANIES AND PUBLIC COMPANIES


4.1. Registers of Directors and Secretary

4.1. Registers of Directors and Secretary


4.1.1. The Register of Directors kept by a Company under section 90 (Register of Directors and Secretaries) of the AIFC Companies Regulations must contain the required particulars of each Person who is or has been a Director of the Company and be kept in alphabetical order of the names.


4.1.2. The Register of Secretaries, if applicable, kept by a Company under section 90 of the AIFC

Companies Regulations must contain the required particulars of each Person who is or has been

a Secretary of the Company, and be kept in alphabetical order of the names.

4.1. Registers of Directors and Secretary


4.1.1.The Register of Directors kept by a Company or the Register kept by the Registrar for Private Companies under section 90 (Register of Directors and Secretaries) of the AIFC Companies Regulations must contain the required particulars of each Person who is or has been a Director of the Company and be kept in alphabetical order of the names.


4.1.2. The Register of Secretaries, if applicable, kept by a Company or the Register kept by the Registrar for Private Companies under section 90 of the AIFC Companies Regulations must contain the required particulars of each Person who is or has been

a Secretary of the Company, and be kept in alphabetical order of the names.

4.2.3

4.2.3.If a Company evidences title to Shares without a Written instrument:

(a) an entry relating to a Person in the Register of Shareholders maintained by the Company under section 52 (Register of Shareholders) of the AIFC Companies Regulations is evidence of the following:

(i) the Person being a Shareholder of the Company;

(ii)the number of Shares held by the Person;

(iii)if the Company has 2 or more classes of issued Shares—the class, or classes, of Shares held by the Person and the number of shares of that class, or each of those classes, held by the Person;

(iv)the date the Person became a Shareholder; and

4.2.3. If a Company evidences title to Shares without a Written instrument:

(a) an entry relating to a Person in the Register of Shareholders maintained by the Company or by the Registrar for Private Companies under section 52 (Register of Shareholders) of the AIFC Companies Regulations is evidence of the following:

(i) the Person being a Shareholder of the Company;

(ii)the number of Shares held by the Person;

(iii)if the Company has 2 or more classes of issued Shares—the class, or classes,

of Shares held by the Person and the number of shares of that class, or each of those classes, held by the Person;

(iv)the date the Person became a Shareholder; and

(b) a transfer of Shares in the Company must take place in accordance with:

(i) if the Company’s Shares are admitted to a register of listed securities—the



(b) a transfer of Shares in the Company must take place in accordance with:

(i) if the Company’s Shares are admitted to a register of listed securities—the

rules of the relevant exchange and clearing house; and

(ii)in any other case—the Company’s Articles of Association.

rules of the relevant exchange and clearing house; and

(ii) in any other case—the Company’s Articles of Association.

4.2.4

4.2.4. No notice of any trust, express, implied or constructive, is to be taken in account of by a Company or entered on the Register of Shareholders maintained by a Company under section 52 (Register of Shareholders) of the AIFC Companies Regulations.

4.2.4. No notice of any trust, express, implied or constructive, is to be taken in account of by a Company or entered on the Register of Shareholders maintained by a Company or by the Registrar for Private Companies under section 52 (Register of Shareholders) of the AIFC Companies Regulations.

AIFC Companies Rules Schedule 3


62

179-4

(8)

Requirements relating to Ultimate Beneficial Ownership Register

10,000



62

179-4 (8)

or (21)

Requirements relating to Ultimate Beneficial Ownership Register

10,000



64

179-7(2)

Register of

Nominee Directors

10,000



64

179-7(2) or

(15)

Register of Nominee Directors

10,000


















Chapter Number/Section

Number


Current version


Proposed version

AIFC General Partnership Rules

Section 2.4

2.4.     Register of partners of General Partnership

2.4.     Register of partners of General Partnership



The partners of a General Partnership must keep, at the registered office of the partnership in the AIFC, a register showing the following particulars for each Person who is or has been a partner, and kept in alphabetical order of their names:

2.4.1. The partners of a General Partnership must keep, at the registered office of the partnership in the AIFC, unless the Register is kept by the Registrar under subrule (2.4.2), a register showing the following particulars for each Person who is or has been a partner, and kept in alphabetical order of their names:


(a)       the partner’s full name;

(a)       the partner’s full name;


(b)if the partner has a former name (including, for an individual, any former given or family)—the former name or, if the partner has 2 or more former names, each former name;

(c)the partner’s date and place of birth, incorporation, formation or registration, as the case may

be;

(b)if the partner has a former name (including, for an individual, any former given or family)—the former name or, if the partner has 2 or more former names, each former name;

(c)the partner’s date and place of birth, incorporation, formation or registration, as the case may be;

(d)the partner’s address or, if the partner has 2 or more addresses, each address;


(d)the partner’s address or, if the partner has 2 or more addresses, each address;

(e)if the partner has had a former address within the last 5 years—the address or, if the partner has had 2 or more former addresses within that period, each former address;

(e)if the partner has had a former address within the last 5 years—the address or, if the partner has had 2 or more former addresses within that period, each former address;

(f)the date the partner was registered as a partner;

(g)if relevant, the date the partner ceased to be registered as a partner.


(f)the date the partner was registered as a partner;

(g)if relevant, the date the partner ceased to be registered as a partner.


2.4.2. A General Partnership may make an election to keep information on the Register kept by the Registrar.


2.4.3. An election may be made under this rule by:



(a) the applicant wishing to incorporate a General Partnership under the Regulations; or



(b) the General Partnership itself once it is incorporated.



2.4.4. In subrule 2.4.3(b), the election is of no effect, without prior agreement of all the Partners of the General Partnership to the making of the election.




2.4.5. An election under this rule is made by giving notice of election to the Registrar.

2.4.6. If the notice is given by Persons wishing to register a General Partnership:

(a) it must be given together with the application for registration under section 12 (AIFC General Partnership Regulations); and


(b) it must be accompanied by a statement containing all the information under subrule 2.4.1.


2.4.7. If the notice is given by the General Partnership, it must be accompaniedby:


(a) a statement by the General Partnership that all the Partners of the General Partnership have assented to the making of the election; and


(b) a statement containing all the information that is required under subrule 2.4.1 to be contained in the General Partnership's register of Partners as at the date of the notice in respect of matters that are current as at that date.


2.4.8. An election made under subrule 2.4.2 takes effect when the notice of election is registered by the Registrar.



2.4.9. The election remains in force until either:


(a) the General Partnership ceases to be a General Partnership; or


(b) a notice of withdrawal sent by the General Partnership under subrule 2.4.13 is registered by the Registrar, whichever occurs first.


2.4.10. A General Partnership must continue to keep a register of Partners in accordance with subrule 2.4.1 containing all the information that was required to be stated in that Register as at the time immediately before the election took effect, but the General Partnership does not have to update that Register to reflect any changes that occur after that time.


2.4.11. The date to be recorded in the Register kept by the Registrar is to be the date on which the document containing that information is registered by the Registrar.


2.4.12. A General Partnership must deliver to the Registrar any information under subrule 2.4.1 that the General Partnership would during the period

when an election under subrule 2.4.2 is in force,




have been obliged under these regulations to enter in its register of Partners, as soon as reasonably practicable but within 14 days.


2.4.13. A General Partnership may by giving notice of withdrawal to the Registrar withdraw an election made by or in respect of it under subrule 2.4.2.


(b) the withdrawal takes effect when the notice is registered by the Registrar;


(b) the effect of withdrawal is that the General Partnership's obligation under subrule 2.4.1 to maintain a register of Partners applies from then on with respect to the period going forward.

(c) the General Partnership must place a note in its register of Partners —

(i) stating that the election under subrule (2.4.2.) has been withdrawn,

(ii)recording when that withdrawal took effect, and

(iii)indicating that information about its Partners relating to the period when the election was in force that is no longer current is available for public inspection on the register kept by the Registrar.

Chapter

Number/Section Number


Current version


Proposed version

AIFC Limited Liability Partnership Rules

Section 2.6.

2.6.Register of members of Limited Liability Partnership

A Limited Liability Partnership mustkeep, at its registered office, a register showing the following particulars for each Person who is or has been a member (including a Designated Member) of the partnership (the member), and kept in alphabetical order of their names:

(a)the member’s full name;

(b)if the member has a former name (including, for an individual, any former given or family name)— the former name or, if the member has 2 or more former names, each former name;

(c)the member’s date and place of birth, incorporation, formation or registration, as the case may be;

2.6.Register of members of Limited Liability Partnership

2.6.1. A Limited Liability Partnership must keep, at its registered office, unless the Register is kept by the Registrar under subrule (2.6.2), a register showing the following particulars for each Person who is or has been a member (including a Designated Member) of the partnership (the member), and kept in alphabetical order of their names:

(a)the member’s full name;

(b)if the member has a former name (including, for an individual, any former given or family name)— the former name or, if the member has 2 or more former names, each former name;

(c)the member’s date and place of

birth, incorporation, formation or registration, as the case may be;



(d)the member’s address or, if the member has 2 or more addresses, each address;

(e)if the member has had a former address withinthe last 5 years— the address or, if the member has had 2 or more former addresses within that period, each former address;

(f)the date the member became a member;

(g)if relevant, the date the member ceased to be a member;

(h)whether the member is or has been a Designated Member;

(i)if the member is or has been a Designated Member—the date (or each of the dates) when the member became a Designated Member and, if relevant, the date (or each of the dates) when the member ceased to be a Designated Member.

(d)the member’s address or, if the member has 2 or more addresses, each address;

(e)if the member has had a former address within the last 5 years— the address or, if the memberhas had 2 or more former addresses within that period, each former address;

(f)the date the member became a member;

(g)if relevant, the date the member ceased to be a member;

(h)whether the member is or has been a Designated Member;

(i)if the member is or has been a Designated Member—the date (or each of the dates) when the member became a Designated Member and, if relevant, the date (or each of the dates) when the member ceased to be a Designated Member.

2.6.2. A Limited Liability Partnership may make an election to keep information on the Register kept by the Registrar.


2.6.3. An election may be made under this rule by:

(a) the applicant wishing to incorporate a Limited Liability Partnership under the Regulations; or

(b) the Limited Liability Partnership itself once it is incorporated.

2.6.4. In subrule 2.6.3(b), the election is of no effect, without prior agreement of all the Members of the Limited Liability Partnership to the making of theelection.


2.6.5. An election under this rule is made by giving notice of election to the Registrar.

2.6.6. If the notice is given by Persons wishing to register a Limited Liability Partnership:

(a) it must be given together with the application for registration under section 10 (AIFC Limited Liability Partnership Regulations); and


(b) it must be accompanied by a statement containing all the information under subrule 2.6.1.


2.6.7. If the notice is given by the Limited Liability Partnership, it must be accompanied by:




(a) a statement by the Limited Liability Partnership that all the Members of the Limited Liability Partnership have assented to the making of the election; and


(b) a statement containing all the information that is required under subrule 2.6.1 to be contained in the Limited Liability Partnership's register of Members as at the date of the notice in respect of matters that are current as at that date.


2.6.8. An election made under subrule 2.6.2 takes effect when the notice of election is registered by the Registrar.



2.6.9. The election remains in force until either:


(a) the Limited Liability Partnership ceases to be a General Partnership; or


(b) a notice of withdrawal sent by the Limited Liability Partnership under subrule 2.6.13 is registered by the Registrar, whichever occurs first.


2.6.10. A Limited Liability Partnership must continue to keep a register of Members in accordance with subrule 2.6.1 containing all the information that was required to be stated in that Register as at the time immediately before the election took effect, but the Limited Liability Partnership does not have to update that Register to reflect any changes that occur after that time.


2.4.11. The date to be recorded in the Register kept by the Registrar is to be the date on which the document containing that information is registered by the Registrar.


2.6.12. A Limited Liability Partnership must deliver to the Registrar any information under subrule 2.6.1 that the Limited Liability Partnership would during the period when an election under subrule 2.6.2 is in force, have been obliged under these regulations to enter in its register of Members, as soon as reasonably practicable but within 14 days.


2.6.13. A Limited Liability Partnership may by giving notice of withdrawal to the Registrar withdraw an election made by or in respect of it under subrule 2.6.2.


(a)the withdrawal takes effect when the notice is registered by the Registrar;




(b) the effect of withdrawal is that the Limited Liability Partnership's obligation under subrule 2.6.1 to maintain a register of Members applies from then on with respect to the period going forward.


(c) the Limited Liability Partnership must place a note in its register of Members—

(i) stating that the election under subrule (2.4.2.) has been withdrawn,

(ii)recording when that withdrawal took effect, and

(iii)indicating that information about its Members relating to the period when the election was in force that is no longer

current is available for public inspection on the register kept by the Registrar.

Chapter

Number/Section Number


Current version


Proposed version

AIFC Fees Rules

New section


2.5.  FEE FOR KEEPING INFROMATION ON THE REGISTER KEPT BY THE REGISTRAR


2.5.1. Person seeking to make election to keep information on the Register kept by the Registrar may be required to accompany by the filing fee prescribed by the Registrar from time to time.


2.5.2.Fee for keeping information on the Register kept by the Registrar specified in Schedule 7.

New Schedule


Schedule 7: FEES FOR KEEPING INFROMATION ON THE REGISTER KEPT BY THE REGISTRAR


At present, the AFSA does not intend to charge an fee for keeping information on the Register kept by the Registrar. Any such fee shall be

determined by the AFSA at a later date.


Consultation Paper No. 0010. Inclusion of Company service providers as Ancillary Service Providers

Introduction

1. The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed amendments to the AIFC General Rules and AIFC Glossary related to inclusion of Company service providers as Ancillary Service Providers.

2. The proposals in this Consultation Paper will be of interest to current and potential AIFC Participants who are interested in doing business in the AIFC.

3. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P-CE-2019-0010” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including onits website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4. The deadline for providing comments on the proposals is 25 October 2019. Once we receive your comments, we shall consider if any refinements are required to the proposals.

5. Comments to be addressed by: post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El avenue, block C3.2, Nur-Sultan, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +7 7172 613626


6. The remainder of this Consultation Paper contains the following:

(a) background to the proposals;

(b) the key element of the proposed amendments;

(c) Annex 1: Draft of proposed amendments.

Background

The Astana Financial Services Authority ("AFSA") proposes to make amendments to the AIFC General Rules and AIFC Glossary with respect to inclusion of Company service providers (CSP) as Ancillary Service Providers (ASP).

It is proposed to amend e the following AIFC Acts:

1) AIFC General Rules

2) AIFC Glossary

KEY ELEMENT OF THE PROPOSED AMENDMENTS

Annex 1

Proposed amendments to AIFC Regulations

Chapter Number/Section Number


Current version


Proposed version

AIFC General Rules

SCHEDULE 2: ANCILLARY SERVICES

4.        Providing Consulting Services


Performing Consultancy Services means providing expert knowledge or advice on a particular topic.

4.        Providing Consulting Services


Performing Consultancy Services means providing expert knowledge or advice on a particular topic. Consultancy Services may include the activity of Company

service providers.

AIFC Glossary

2. INTERPRETATION

Company service provider


A company service provider is a person, not captured by (a) to (e) of the definition of DNFBP that, by way of business, provides any of the following services to a customer:


(a) acting as an agent of legal persons to form a company; (b) acting as, or arranging for another person to act as, a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;

(c) providing a registered office, business address, or accommodation, correspondence or administrative address for a company, a partnership, or any other legal person or arrangement; or

(d) acting as, or arranging for another person to act as, a nominee shareholder for another person.

Company service provider


A Company service provider is a Person, not captured by (a) to (e) of the definition of DNFBP that, by way of business, provides any of the following services to a customer:


(a) acting as an agent of legal persons to form a company;

(b) acting as, or arranging for another Person to act as, a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;

(c) providing a registered office, business address, or accommodation, correspondence or administrative address for a company, a partnership, or any other legal person or arrangement; or

(d) acting as, or arranging for another

Person to act as, a nominee shareholder for another Person.

2. INTERPRETATION

DNFBP


Designated Non-Financial Business and Profession.


The following class of persons whose business or profession is carried on in or from the AIFC constitute DNFBPs:


(a) A real estate developer or agency which carries out transactions with a customer

DNFBP


Designated Non-Financial Business and Profession.


The following class of persons whose business or profession is carried on in or from the AIFC constitute DNFBPs:


(a) A real estate developer or agency which carries out transactions with a customer


involving the buying or selling of real property;

(b) A dealer in precious metals or precious stones;

(c) A dealer in any saleable item of a price equal to or greater than USD 15,000;

(d) A law firm, notary firm, or other independent legal business;

(e) An accounting firm, audit firm, or insolvency firm; or

(f) A company service provider; or

(g) A Single Family Office.

A person who is an Authorised Person or a Registered Auditor is not a DNFBP.

involving the buying or selling of real property;

(b) A dealer in precious metals or precious stones;

(c) A dealer in any saleable item of a price equal to or greater than USD 15,000;

(d) A law firm, notary firm, or other independent legal business;

(e) An accounting firm, audit firm, or insolvency firm; or

(f) A Company service provider; or

(g) A Single Family Office.

A person who is an Authorised Person or a Registered Auditor is not a DNFBP.

Consultation Paper No. 0011 on the proposed amendments to AIFC FSFR, GLO, COB and CO-OP

Introduction

1. The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed amendments to the AIFC Financial Services Framework Regulations, AIFC Glossary, AIFC Co-operation and Exchange of Information Rules, and AIFC Conduct of Business Rules.

2. The proposals in this Consultation Paper will be of interest to current and potential AIFC participants who are interested in exercising business activities in or from the AIFC.

3. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P- CE-2019-0011” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4. The deadline for providing comments on the proposals is 25 October 2019. Once we receive your comments, we shall consider if any refinements are required to this proposal.

5. Comments to be addressed by post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El, building C3.2, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +8 7172 613781

6. The remainder of this Consultation Paper contains the following:

(a) Background to the proposals

(b) Key elements of the proposed amendments

(c) Annex 1: Draft of proposed amendments to the AIFC Financial Services Framework Regulations

(d) Annex 2: Draft of proposed amendments to the AIFC Glossary

(e) Annex 3: Draft of proposed amendments the AIFC Co-operation and Exchange of Information Rules

(f) Annex 4: Draft of proposed amendments to the AIFC Conduct of Business Rules

Background

On the proposed amendments to the AIFC Financial Services Framework Regulations and AIFC Glossary concerning the appointment of auditors

1. The current wordings of AIFC Financial Services Framework Regulations (FSFR), AIFC Market Rules (MAR) and AIFC Glossary require the Authorised Person and Reporting Entities to appoint auditors who are Ancillary Service Providers. It is proposed to eliminate the requirement for Authorised Person registered as recognised companies or recognised partnerships and Reporting Entities in the AIFC to appoint an auditor who are Ancillary Services Providers by amending FSFR and Glossary.

On the proposed amendments to the AIFC Co-operation and Exchange of Information Rules

2. The AIFC Co-operation and Exchange of Information Rules (CO-OP) envisage that if the AFSA intends to disclose confidential information received from a Financial Services Regulator to Persons specified in the CO-OP it may give notice to the Person(s) to whom the disclosure relates. Current wording of CO-OP 3.2.8 covers providing notice only in relation to information received from Financial Services Regulator and does not cover the information generated by the AFSA. Therefore, it is proposed to delete the wording “received from a Financial Services Regulator” by amending CO-OP.

On the proposed amendments to the AIFC Conduct of Business Rules

3. Under current definition of the Professional Clients, a minimum threshold for net assets of individual clients is not proportionate to the income level in the country. Analysis of laws and regulatory requirements of the professional client classification in the region shows that AIFC threshold is more than 10 times higher than in Russia and more than 20 times than in Kyrgyzstan. It is proposed to reduce current net assets requirement for Assessed Professional Clients by amending AIFC Conduct of Business Rules (COB).


KEY ELEMENTS OF THE PROPOSED AMENDMENTS

Annex 1

Proposed Amendment

to AIFC Financial Services Framework Regulations

In this document, the underlining indicates a new text and the striking through indicates deleted text in the proposed amendments

Chapter 3. Accounting / Auditing

109. Requirement to appoint an auditor Auditor

An Authorised Person must appoint an auditor Auditor who is an Ancillary Service Provider.

Annex 2

Proposed Amendment to AIFC Glossary

In this document, the underlining indicates a new text and the striking through indicates deleted text in the proposed amendments




Auditor

(a) in relation to an Authorised Person which is incorporated in the AIFC has the meaning given in AUD 1;

(b) in relation to an Authorised Person which is a Recognised Company or Recognised Partnership – an auditor of that Authorised Person;

(c)  in relation to a Reporting Entity – an auditor.


Annex 3

Proposed Amendment

to the AIFC Co-operation and Exchange of Information Rules

In this document, the striking through indicates deleted text in the proposed amendment

3. CONFIDENTIALITY (…)

3.2. Requests to obtain information (…)

3.2.8. Notice of disclosure

If the AFSA intends to disclose confidential information received from a Financial Services Regulator to any of the Persons specified in subsection 2.2, the AFSA may give notice to the Person(s) to whom the disclosure relates in the following circumstances:

(a) the disclosure relates to a Person’s compelled testimony to a law enforcement

(b) agency for the purpose of criminal proceedings against thatPerson;

(c) the disclosure relates to private civil litigation, in order that the Person may challenge the request according to the Rules of the AIFC Court; or

(d) there are serious and legitimate concerns about the appropriateness of the disclosure, including where the body requesting the confidential information does not perform a financial service related regulatory function.

Annex 4

Proposed Amendment

to the AIFC Conduct of Business Rules

In this document, the underlining indicates a new text and the striking through indicates deleted text in the proposed amendments

2.5.1. Assessed Professional Clients: Individual Clients

For the purposes of COB 2.3.1, an Authorised Firm may treat an individual Client as an Assessed Professional Client if:

(a)   the Client has net assets of at least USD 1 million 100,000;

(b)   either:

(i)the Authorised Firm assesses the Client, on reasonable grounds, to have sufficient experience and understanding of relevant Financial Products, Financial Services, Transactions and any associated risks; or

(ii)the Client works or has worked in the previous two years in an Authorised Firm or any other authorised or regulated financial institution, including a bank, securities firm or insurance company, in a position that requires knowledge of the type of Financial Products, Financial Services or Transactions envisaged; and

(c)   the following procedure is followed:

(i)the Client must confirm in writing to the Authorised Firm that it wishes to be treated as a Professional Client either:

(1) generally;

(2) in respect of a specific Financial Product, Financial Service, or Transaction; or

(3) in respect of a type of Financial Product, Financial Service, or Transaction;

(ii)the Authorised Firm must give the Client a clear warning in writing setting out the protections that the Client may lose as a result of giving up its classification as a Retail Client; and

(iii)the Client must confirm in writing, in a separate document from the client agreement or other contract, that it is aware of the consequences of losing such protections.

Guidance: Meaning of an "individual"

For the purposes of COB 2.5.1, an "individual" means a Person who is a natural person and not an Undertaking.

*Consultation Paper No.23 on proposed revisions to AIFC investment funds framework

*Consultation Paper No.26 on proposed revisions to AIFC investment funds framework

Consultation Paper No.0008 on proposed amendments to AIFC Legal entities framework

Introduction

1. The Astana Financial Services Authority (AFSA) has issued this Consultation Paper to invite public comments on the proposed amendments to the AIFC Regulations and Rules which aim at updating and modernising the legal framework to meet the current needs of business and provide the flexibility needed for companies to operate in an evolving business environment

2. The proposals in this Consultation Paper will be of interest to current and potential AIFC Participants who are interested in doing business in the AIFC.

3. All comments should be in writing and sent to the address or email specified below. If sending your comments by email, please use “Consultation Paper AFSA-P-CE-2019-0008” in the subject line. You may, if relevant, identify the organisation you represent when providing your comments. The AFSA reserves the right to publish, including onits website, any comments you provide, unless you expressly request otherwise. Comments supported by reasoning and evidence will be given more weight by the AFSA.

4. The deadline for providing comments on the proposals is 2 October 2019. Once we receive your comments, we shall consider if any refinements are required to the proposals.

5. Comments to be addressed by:

post: Policy and Strategy Division

Astana Financial Services Authority (AFSA)

55/17 Mangilik El avenue, block C3.2, Nur-Sultan, Kazakhstan or emailed to: consultation@afsa.kz

Tel: +7 7172 613626

6. The remainder of this Consultation Paper contains the following:

(a) background to the proposals;

(b) the list of key elements of the proposed amendments;

(c) Annex 1: Draft of proposed amendments to AIFC Regulations;

(d) Annex 2: Draft of proposed amendments to AIFC Rules;

(e) Annex 3: Draft of the proposed amendments to the Schedule 1 of the AIFC Companies Rules.

Background

The Astana Financial Services Authority ("AFSA") proposes to make amendments to the AIFC Companies Regulations which aim at updating and modernising the legal framework to meet the current needs of business and provide the flexibility needed for companies to operate in an evolving business environment.

The amendments introduce a number of changes to simplify and improve the AIFC legal framework, including a variety of deregulatory measures which have been widely welcomed by business in global financial centres. Best practices of the United Kingdom, Singapore and DIFC were considered in preparing this proposal.

The proposed amendments are intended to apply generally to the AIFC Participants. It is accordingly proposed to amend each of the following AIFC Acts to give effect to the general legal framework:

1) AIFC Companies Regulations

2) AIFC General Partnership Regulations

3) AIFC Limited Partnership Regulations

4) AIFC Limited Liability Partnership Regulations

5) AIFC Non-Profit Incorporated Organisations Regulations

6) AIFC Foundations Regulations

7) AIFC Companies Rules

8) AIFC General Partnership Rules

9) AIFC Limited Partnership Rules

10) AIFC Limited Liability Partnership Rules

11) AIFC Non-Profit Incorporated Organisations Rules

12) AIFC Special Purpose Company Rules

13) AIFC Fees Rules

KEY ELEMENTS OF THE PROPOSED AMENDMENTS

The key aspects of the proposal include:

1) Substitution of Annual return with Confirmation Statement.

The Confirmation Statement is based on the 2016 amendments to the UK Companies Act which substituted such statements for Annual Returns. The Confirmation statement is intended to serve roughly the same purpose as the Annual return: for companies to provide up-to-date information for inclusion on the Register. However, one main difference is that rather than the AIFC Participants providing a snapshot of their data at a specific date, AIFC Participants will need to ‘check and confirm’ the information that the Registrar holds is accurate.

2) Introduction of corporate directorship possibility for Companies, so that an Ancillary Service Provider or a holding company may serve as a corporate director, and giving the Registrar power to give permission in other circumstances. However, companies will be required to have at least one director who is a natural person. This amendment is consistent with the approach taken in the UK and the Netherlands, while maintaining the transparency and accountability of directors.

3) Transferring the AFSA Board of Directors’ power to adopt rules in relation to (i) prescribing standard articles of association; (ii) forms, procedures and requirements under the Companies Regulations, the Rules or any other Legislation Administered by the Registrar; and (iii) keeping of public registers and database to the Registrar. Granting of such restricted rule-making power to the Registrar will improve the operational efficiency of AFSA.

4) Revision of the Standard Articles of Association for Private Companies, and elimination of the requirement to file Standard Articles with the Registrar.

Topics dealt with for the first time or in greater detail include:

(a) removal of a section on the registered address. The registered address shall be that provided in the public register;

(b) introduction of a section on liability of Shareholders;

(c) introduction of a section on classes of Shares;

(d) revision of the section on transmission of shares;

(e) introduction of a section on Shareholders’ reserve power;

(f) introduction of a section on Lien over partly paid shares;

(g) introduction of a section on calls on shares and forfeiture;

(h) other matters.

These have largely been modelled on corresponding provisions in the United Kingdom Companies Act 2006 and their corresponding private company model articles as well as the model articles of DIFC.

5) Granting additional power for the Registrar of Companies to waive and modify any provisions of legislation administered by the Registrar, declared by the Rules to be a provision to which waivers and modifications apply. This will increase the operational efficiency of the AFSA, and is consistent with the approach taken in the DIFC.

6) Extending the scope of the Scheme of arrangement section to include body corporates incorporated outside of the AIFC to participate in restructuring or amalgamation. This is in line with the English High Court’s decisions concerning schemes of arrangement (English High court cases of German-incorporated companies PrimaCom Holding GmbH and Rodenstock GmbH).

7) Other miscellaneous enhancements.

Question

Do you have any concerns related to the proposed amendments to AIFC Rules and Regulations? If so, what are they, and how should they be addressed?

Annex 1

Proposed amendments to AIFC Regulations

In this table, the underlining indicates a new text and the striking through indicates deleted text in the proposed amendments

Section Number

Current version

Proposed version

Comments

1. AIFC Companies Regulations

Section 13

13. Formation of companies

(1) A company may be incorporated under these Regulations on the application of any 1 or more Persons in accordance with this Part.


(2) A company must not be incorporated for an unlawful purpose.


(3) An application for the incorporation of a company must be filed with the Registrar by the

Incorporators or their duly authorised representative.


(4) The application must state the following:

(a) the proposed name of the Company;

(b) whether the proposed Company is to be a Private Company or a Public Company;

(c) the nature of the business to be conducted by the proposed Company;

(d) the amount of the initial share capital and shareholdings of the Incorporators;

(e) the nominal value of each Share;

(f) the address of the proposed Company’s registered office;

(g) the following information for each Incorporator:

13. Formation of companies

(1) A company may be incorporated under these Regulations on the application of any 1 (one) or more Persons in accordance with this Part.


(2) A company must not be incorporated for an unlawful purpose.


(3) An application for the incorporation of a company must be filed with the Registrar by the Incorporators or their duly authorised representative.


(4) The application must state the following:

(a) the proposed name of the Company;

(b) whether the proposed Company is to be a Private Company or a Public Company;

(c) the nature of the business to be conducted by the proposed Company;

(d) the amount of the initial share capital and shareholdings of the Incorporators;

(e) the nominal value of each Share;

(f) the address of the proposed Company’s registered office;

(g) the following information for each Incorporator:

Category 4) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(i) the full name, nationality and address of the Incorporator;

(ii)if the Incorporator is an individual and is to hold Shares in trust for another

Person—the full name, nationality and address of the beneficial owner of the

Shares;

(iii)if the Incorporator is a Body Corporate—the beneficial ownership information of

the Body Corporate required by the Rules;

(h) the full name (including any previous names), nationality, address, business occupation (if any) and date of birth of the individuals who are to serve as the Directors and, if applicable, the Secretary;

(i) the other particulars (if any) required by the Registrar or the Rules; and

(j) the particulars required by Part 14-1 (Ultimate Benefecial Owners) of these Regulations.


(5) The proposed Articles of Association, signed by or on behalf of each Incorporator, must be filed with the application.

(i) the full name, nationality and address of the Incorporator;

(ii)if the Incorporator is an individual and is to hold Shares in trust for another

Person—the full name, nationality and address of the beneficial owner of the

Shares;

(iii)if the Incorporator is a Body Corporate—the beneficial ownership information of

the Body Corporate required by the Rules;

(h) the full name (including any previous names), nationality, address, business occupation (if any) and date of birth of the individuals who are to serve as the Directors and, if applicable, the Secretary;

(i) the other particulars (if any) required by the Registrar or the Rules; and

(j) the particulars required by Part 14-1 (Ultimate Benefecial Beneficial Owners) of these Regulations.



(5)         Unless the Standard Articles are adopted by a Company in their entirety, the proposed Articles of Association, signed by or on behalf of each Incorporator, must be

filed with the application.


Section 14

14. Articles of Association


(1) A Company’s Articles of Association must be in the English language and must be divided into paragraphs numbered consecutively.


(2) A Company’s Articles of Association must contain:

(a) a statement as to whether the Company is a Private Company or a Public Company; and


(b) the information mentioned in section 13(4)(a) to (h) (Formation of companies); and


(c) the other matters (if any) required by these Regulations or the Rules to be included in the Articles of Association of a Company.


(3) The Articles of Association may contain any other matters that the Shareholders wish to include in the Articles of Association. However, the Articles of Association must not contain a provision that is inconsistent with these Regulations or the Rules.

14.         Articles of Association


(1)A Company’s Articles of Association must be in the English language and must be divided into paragraphs numbered consecutively.


(2)A Company’s Articles of Association must contain:


(a)a statement as to whether the Company is a Private Company or a Public Company; and


(b)the information mentioned in section 13(4)(a) to (h) (c) (Formation of companies); and


(c)the other matters (if any) required by these Regulations or the Rules to be included in the Articles of Association of a Company.


(3)         The Articles of Association may contain any other matters that the Shareholders wish to include in the Articles of Association. However, the Articles of

Association must not contain a provision that

Category 4) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(4) A Company may adopt, as its Articles of Association, the whole or any part of the Standard Articles that is relevant to the Company.


(5) If Standard Articles are not adopted by a Company in their entirety, the Company must submit to the Registrar, before the Articles of Association are adopted by the Company, a statement by the Incorporators that the Articles of Association proposed to be adopted by the Company comply with the requirements of these Regulations, the Rules and all other applicable AIFC Regulations and AIFC Rules.


(6) If any change to these Regulations, the Rules or any other applicable AIFC Regulations or AIFC Rules results in an inconsistency between the provisions of a Company’s Articles of Association and the provisions of these Regulations, the Rules or any other applicable AIFC Regulations or AIFC Rules:

(a) the provisions of these Regulations and any other applicable AIFC Regulations and AIFC

Rules prevail; and

(b) the Company is not required to amend its Articles of Association, unless these Regulations, the Rules or any other applicable AIFC Regulations expressly require it to

do so.

is inconsistent with these Regulations or the Rules.


(4)A Company may adopt, as its Articles of Association, the whole or any part of the Standard Articles that is relevant to the Company.


(5)If Standard Articles are not adopted by a Company in their entirety, the Company must submit to the Registrar, before the Articles of Association are adopted by the Company, a statement by the Incorporators that the Articles of Association proposed to be adopted by the Company comply with the requirements of these Regulations, the Rules and all other applicable AIFC Regulations and AIFC Rules.


(6)If any change to these Regulations, the Rules or any other applicable AIFC Regulations or AIFC Rules results in an inconsistency between the provisions of a Company’s Articles of Association and the provisions of these Regulations, the Rules or any other applicable AIFC Regulations or AIFC Rules:

(a)the provisions of these Regulations and any other applicable AIFC Regulations and AIFC Rules prevail; and

(b)the Company is not required to amend its Articles of Association, unless these Regulations, the Rules or any other applicable AIFC Regulations expressly

require it to do so.


Section 15

15. Decision on incorporation application etc.


(1) The Registrar may refuse to incorporate a Company for any reason the Registrar considers to be a proper reason for refusing to incorporate the Company.


(2) If the Registrar incorporates a Company, the Registrar must register the Articles of Association

filed with the application for incorporation.

15.         Decision on incorporation application etc.


(1)The Registrar may refuse to incorporate a Company for any reason the Registrar considers to be a proper reason for refusing to incorporate the Company.


(2)If the Registrar incorporates a Company, the Registrar must register the Articles of Association filed with the application for incorporation, unless Standard Articles are adopted by a Company in their

entirety.

Category 4) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper

Section 16

16. Effects of incorporation etc.


(1) On the incorporation of a Company and registration of its Articles of Association, the Registrar must:


(a) issue a certificate of incorporation confirming that the Company is incorporated

16.         Effects of incorporationetc.


(1)On the incorporation of a Company and registration of its Articles of Association, the Registrar must:


(a)issue a certificate of incorporation confirming that the Company is incorporated

Category 4) of amendments set out in “Key elements of proposed amendments” of the Consultation

Paper


as either a Private Company or a Public Company; and


(b) assign a number to the Company, which is to be the Company’s identification number;

And


(c) enter the name of the Company in the Register.


(2) On the date of incorporation mentioned in the certificate of incorporation:


(a) the Incorporators of the Company become the Shareholders of the Company; and


(b) the Company, having the name contained in the certificate of incorporation, becomes a body corporate, capable of Exercising all the Functions of an incorporated Company.


(3) A certificate of incorporation issued by the Registrar is conclusive evidence of the following matters:


(a) that the Company has been duly incorporated;


(b) whether the Company is a Public Company or a Private Company;


(c) that the requirements of these Regulations and the Rules have been complied with in respect of the incorporation of the Company.


(4) Without limiting subsection (1)(a), the Registrar may make alternative arrangements relating to the issue of certificates of incorporation to Companies in circumstances prescribed by the Rules.

as either a Private Company or a Public Company; and


(b)assign a number to the Company, which is to be the Company’s identification number; and


(c)enter the name of the Company in the Register.


(2)On the date of incorporation mentioned in the certificate of incorporation:


(a)the Incorporators of the Company become the Shareholders of the Company; and


(b)the Company, having the name contained in the certificate of incorporation, becomes a body corporate, capable of Exercising all the Functions of an incorporated Company.


(3)A certificate of incorporation issued by the Registrar is conclusive evidence of the following matters:


(a)that the Company has been duly incorporated;


(b)whether the Company is a Public Company or a Private Company;


(c)that the requirements of these Regulations and the Rules have been complied with in respect of the incorporation of the Company.


(4)         Without limiting subsection (1)(a), the Registrar may make alternative arrangements relating to the issue of certificates of incorporation to Companies in

circumstances prescribed by the Rules.


Section 17

17. Notification of change in Registered Details of Company


(1) If any of the Registered Details of a Company change, the Company must notify the Registrar in

Writing of the change within 14 days after the day the change happens and must comply with all

other requirements applying to the Company under the Rules in relation to the change.


(2) Contravention of this section is punishable by a fine.

17. Notification of change in Registered Details of Company


(1) If any of the Registered Details of a Company change, the Company must notify the Registrar in

Writing of the change within 14 days after the day the change happens and must comply with all

other requirements applying to the Company under the Rules in relation to the change.


(2) Contravention of this section is punishable by a fine.

Category 7) of amendments set out “Key elements of proposed amendments” of the Consultation Paper



(3) The change in Registered Details notice must be accompanied by the fee prescribed by the Rules from time to time.


Section 18

18. Effect of Articles of Association


(1) Subject to these Regulations and the Rules, on registration the Articles of Association bind the Company and its Shareholders to the same extent as if theyhad been signed by the Company and by each Shareholder, and contained covenants by the Company and each Shareholder to comply with all their provisions.


(2) An amount payable by a Shareholder to the Company under the Articles of Association is a debt due from the

Shareholder to the Company.

18.         Effect of Articles ofAssociation


(1)Subject to these Regulations and the Rules, on registrationthe Articles of Association bind the Company and its Shareholders to the same extent as if they had been signed by the Company and by each Shareholder, and contained covenants by the Company and each Shareholder to comply with all their provisions.


(2)An amount payable by a Shareholder to the Company under the Articles of Association is a debt due from the

Shareholder to the Company.

Category 4) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper

Section 19

19. Amendment of Articles of Association


(1) Subject to these Regulations and the Rules, a Company may amend its Articles of Association by Special Resolution.


(2) Unless an amendment of the Articles of Association of a Company relates solely to a change of its name, correcting manifest errors or increasing the amount of its authorised or issued share capital, the Company must, before the amendment is made, submit to the Registrar:


(a) the proposed amendment; and


(b) a certificate given by at least 1 of the Directors of the Company stating that the proposed amendment complies with the requirements of these Regulations and the Rules and all other applicable AIFC Regulations and AIFC Rules.


(3) If the Articles of Association of a Company are amended, the rights and obligations of the

Shareholders and the Company that arose under the Articles of Association before the amendment is made are not be affected unless the amendment expressly provides for it to have such an effect.


(4) Despite anything in the Articles of Association of a Company, a Shareholder of the Company is not bound by an amendment made to the articles after the day the Shareholder became a Shareholder so far as the amendment:

19.         Amendment of Articles of Association


(1)Subject to these Regulations and the Rules, a Company may amend its Articles of Association by Special Resolution or by any other means provided by the Company’s Articles of Association.


(2)Unless an amendment of the Articles of Association of a Company relates solely to a change of its name, correcting manifest errors or increasing the amount of its authorised or issued share capital, the The Company mustCompany must, before the amendment is made, within 14 days after the amendments to the Articles of Association are made, submit to the Registrar:


(a)the proposed amendmenta copy of the Articles of Association as amended; and


(b)a certificate given by at least 1 of the Directors of the Company stating that the proposed amendment complies with the requirements of these Regulations and the Rules and all other applicable AIFC Regulations and AIFC Rules; and


(c) a copy of a Special Resolution, agreement, enactment, order or any other document by which the Articles of Association are amended.


(2-1)     The Registrar may rely on the certificate, provided in accordance with subsection 2 (b), as sufficient evidence of thematters stated in it.

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(c) requires the Shareholder to take or subscribe for more Shares than those held by the

Shareholder at the end of the day immediately before the amendment is made; or


(d) in any way increases the Shareholder’s Liability at the end of that day to contribute to the

Company’s share capital or otherwise to pay an amount to the Company.


(5) Subsection (4) does not apply in relation to the Shareholder if the Shareholder, either before or

after the amendment is made, agreed to be bound by it.

(3)If the Articles of Association of a Company are amended, the rights and obligations of the Shareholders and the Company that arose under the Articles of Association before the amendment is made are not be affected unless the amendment expressly provides for it to have such an effect.


(4)Despite anything in the Articles of Association of a Company, a Shareholder of the Company is not bound by an amendment made to the articles after the day the Shareholder became a Shareholder so far as the amendment:


(c a)      requires the Shareholder to take or subscribe for more Shares than those held by the Shareholder at the end of the day immediately before the amendment is made; or


(d b)      in any way increases the Shareholder’s Liability at the end of that day to contribute to the Company’s share capital or otherwise to pay an amount to the Company.


(5)Subsection (4) does not apply in relation to the Shareholder if the Shareholder, either before or after the amendment is made,

agreed to be bound by it.


Section 22

22. Change of Company name

22.         Change of Company name


(1)A Company must not change its name otherwise than by Special Resolution or by other means provided for by the company’s Articles of Association and must not change its name to a name that is not acceptable to the Registrar.


(2)If a Company changes its name by Special Resolution in accordance with subsection (1), the Company must filethe Special Resolution the accompanying notice or a statement that the change of name has been made by means provided for by the company’s Articles of Association with the Registrar within 14 days after the day the Special Resolution is passed the change is made.


(3)Contravention of subsection (1) or

(2) is punishable by a fine.


(4)         If a Company changes its name and complies with subsection (2) in relation to the

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(1) A Company must not change its name otherwise than by Special Resolution and must not change its name to a name that is not acceptable to the Registrar.



(2) If a Company changes its name by Special Resolution in accordance with subsection (1), the Company must file the Special Resolution with the Registrar within 14 days after the day the Special Resolution is passed.




(3) Contravention of subsection (1) or (2) is punishable by a fine.


(4) If a Company changes its name and complies with subsection (2) in relation to the change, the Registrar must, as soon as practicable:


(a) enter the new name in the Register in place of the former name; and

change, the Registrar must, as soon as practicable:


(a)enter the new name in the Register in place of the former name; and


(b)issue a certificate of name change showing the previous name and the new name of the Company.


(5)The change of name takes effect on the day the Registrar issues the certificate of name change.


(6)The change of name does not:


(a)affect any rights or obligations of the Company; or


(b)render defective any legal proceedings by or against it.


(7)Any legal proceedings that could have been commenced or continued against the Company under its former name may be commenced or continued against it under its new name.


(8)A Company may obtain the prior approval of the Registrar to the new name before the name is changed by Special

Resolution.


(b) issue a certificate of name change showing the previous name and the new name of the

Company.

(5) The change of name takes effect on the day the Registrar issues the certificate of name change.

(6) The change of name does not:

(a) affect any rights or obligations of the Company; or

(b) render defective any legal proceedings by or against it.

(7) Any legal proceedings that could have been commenced or continued against the Company under its former name may be commenced or continued against it under its new name.

(8) A Company may obtain the prior approval of the Registrar to the new name before the name is changed by Special Resolution.

Section 24

24. Registered office and conduct of business


(1) A Company must, at all times, have a registered office in the AIFC to which all communications

and notices to the Company may be addressed.

(2) A Document may be served on a Company by leaving it at, or sending it by post to, the registered office of the Company in the AIFC.

24.         Registered office and conduct of business


(1)A Company must, at all times, have a registered office in the AIFC to which all communications and notices to the Company may be addressed.


(2)A Document may be served on a Company by leaving it at, or sending it by post to, the registered office of the Company in the AIFC.


(3)A Company must conduct its principal business activity in the AIFC, unless the Registrar otherwise permits.


(3-1)     A Company may change the address of its registered office by giving notice to the Registrar. The change takes effect upon the notice being registered by the Registrar.


(4)Contravention of subsection (1) or

(3) is punishable by a fine.

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(3) A Company must conduct its principal business activity in the AIFC, unless the Registrar otherwise permits.



(4) Contravention of subsection (1) or (3) is punishable by a fine.


New section


25-1.     Annual confirmation of accuracy of information on register

Category 1) of amendments

that substitut es section 26



(1)Every Company must, before the end of the period of 14 days after the end of each review period, deliver to the Registrar:


(a)such information as is necessary to ensure that the Company is able to make the statement referred to in paragraph (b), and

set out in “Key elements                         of proposed amendments” of                     the

Consultation Paper


(b)      a statement (a “confirmation statement”) confirming that all information required to be delivered by the Company to the Registrar in relation to the confirmation period concerned under any duty mentioned in subsection (2) either:



(i)    has been delivered, or



(ii) is being delivered at the same time as the confirmation statement.



(2)         The following duties are duties to notify:



(a)       the duty to give notice of a change in the address of the company's registered office;



(b)         the duty to give notice of a change in Shareholders or in particulars required to be included in Register of Shareholders;



(c)       the duty to give notice of a change in Directors or in particulars required to be included in Register of Directors;



(d)      in the case of a Company with a Secretary or a Public Company, the duty to give notice of a change in Secretary or joint Secretaries or in particulars required to be included in Register of Secretaries;



(e)         the duty to give notice of a change in Nominee Directors or in particulars required to be included in Register of Nominee Directors;




(f)the duty to give notice of a change in of UBO Details in relation to each of its Ultimate Beneficial Owners;


(g)in the case of a Company which keeps any company records at a place other than its registered office, any duty under this Regulations to give notice of a change in the address of that place;


(h)the duty to notify a change in company's principal business activities;


(i)the duty to deliver statement of capital;


(j)the duty to give a statement, for each class of Shares in the Company, setting out either:

(i)the name and address of each Shareholder who, on the filing date, held not less than 5% of the Allotted Shares of that class and the number of Shares of that class held by the Shareholder, together with the number of Shareholders each of whom, on that date, held less than 5% of the Allotted Shares of that class and the total number of Shares held by them; or


(ii)the name and address of every Shareholder who, on the filing date, held any Shares of that class and the number of Shares of that class held by the Shareholder; and


(m)the duty to give notice of a change in number of Shares held by the Company as treasury Shares;


(n) the duty to give notice of a change in other information (if any) required by the Regulations and Rules.


(3)         In this section:




 confirmation period means


(a)     in relation to a Company's first confirmation statement, means the period beginning with the day of the Company's incorporation and ending with the date specified in the statement (“the confirmation date”);


(b)    in relation to any other confirmation statement of a Company, means the period beginning with the day after the confirmation date of the last such statement and ending with the confirmation date of the confirmation statement concerned.


(4)The confirmation date of a confirmation statement must be no later than the last day of the review period concerned.


(5)For the purposes of this section, each of the following is a review period:


(a)     the period of 12 months beginning with the day of the company's incorporation;


(b)    each period of 12 months beginning with the day after the end of the previous review period.


(6)But where a Company delivers a confirmation statement with a confirmation date which is earlier than the last day of the review period concerned, the next review period is the period of 12 months beginning with the day after the confirmation date.


(7)For the purpose of making a confirmation statement, a Company is entitled to assume that any information has been properly delivered to the Registrar if it has been delivered within the period of 5 days ending with the date on which the statement is delivered.


(8)But subsection (7) does not apply in a case where the Company has received notice from the Registrar that such information has not been properly delivered.


(9)The confirmation statement must be accompanied by the filing fee prescribed by the Rules from time to time.


(10)A Shareholder may request a Company to provide a copy of a confirmation




statement of the Company to the Shareholder. If the Shareholder pays the reasonable fee (if any) that the Company requires, the Companymust, within 10 days after the day the request is received or the day any required payment is made (whichever is later), either give the Shareholder a written copy of the confirmation statement or make a written copy of the confirmation statement available for the Shareholder at the Company’s registered office.


(11)A Person may request a Public Company to provide a copy of a confirmation statement of the Public Company to the Person. If the Person pays the reasonable fee (if any) that the Public Company requires, the Public Company must, within 10 days after the day the request is received or the day any required payment is made (whichever is later), either give the Person a written copy of the confirmation statement or make a written copy of the confirmation statement available for the Person at the Public Company’s registered office.


(12)Contravention of this section is punishable by a fine.


Section 26

26. Annual returns


(1) A Company must, within 6 months of the end of each financial year, or other date the Registrar considers appropriate, file with the Registrar an annual return containing:


(a) its financial statements for the last financial year for which the Company’s accounts have

been prepared; and


(b) a statement, for each class of Shares in the Company, setting out either:

(i) the name and address of each Shareholder who, on the filing date, held not less

than 5% of the Allotted Shares of that class and the number of Shares of that class

held by the Shareholder, together with the number of Shareholders each of whom,

on that date, held less than 5% of the Allotted Shares of that class and the total

number of Shares held by them; or

(ii)the name and address of every Shareholder who, on the filing date, held any Shares of that class and the number of Shares of that class held by the

Shareholder; and

26. Annual returns [intentionally omitted]


(1) A Company must, within 6 months of the end of each financial year, or other date the Registrar considers appropriate, file with the Registrar an annual return containing:


(a) its financial statements for the last financial year for which the Company’s accounts have

been prepared; and


(b) a statement, for each class of Shares in the Company, setting out either:

(i) the name and address of each Shareholder who, on the filing date, held not less

than 5% of the Allotted Shares of that class and the number of Shares of that class

held by the Shareholder, together with the number of Shareholders each of whom,

on that date, held less than 5% of the Allotted Shares of that class and the total

number of Shares held by them; or (ii) the name and address of every

Shareholder who, on the filing date, held any Shares of that class and the number of Shares of that class held by the

Shareholder; and

Category 1) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(c) the particulars mentioned in section 13(4)(j) (Formation of companies) for each Director

and, if applicable, the Secretary; and

(c) the particulars mentioned in section 13(4)(j) (Formation of companies) for each Director

and, if applicable, the Secretary; and


(d) if Shares are held by the Company as treasury Shares—the entry required by section

62(8)(a) (Treasury Shares); and

(d) if Shares are held by the Company as treasury Shares—the entry required by section

62(8)(a) (Treasury Shares); and

(e) the other information, and declarations, (if any) required by the Rules.

(e) the other information, and declarations, (if any) required by the Rules.

(2) The annual return must be accompanied by the filing fee prescribed by the Rules from time to time.

(2) The annual return must be accompanied by the filing fee prescribed by the Rules from time to time.

(2-1) A Shareholder may request a Company to provide a copy of an annual return of the Company to the Shareholder. If the Shareholder pays the reasonable fee (if any) that the Company requires, the Company must, within 10 days after the day the request is received or the day any required payment is made (whichever is later), either give the Shareholder a written copy of the annual return or make a written copy of the annual return available for the Shareholder at the Company’s registered office.

(3) A Person may request a Public Company to provide a copy of an annual return of the Public

Company to the Person. If the Person pays the reasonable fee (if any) that the Public Company

requires, the Public Company must, within 10 days after the day the request is received or the day any required payment is made (whichever is later), either give the Person a written copy of the annual return or make a written copy of the annual return available for the Person at the Public Company’s registered office.

(2-1) A Shareholder may request a Company to provide a copy of an annual return of the Company to the Shareholder. If the Shareholder pays the reasonable fee (if any) that the Company requires, the Company must, within 10 days after the day the requestis received or the day any required payment is made (whichever is later), either give the Shareholder a written copy of the annual return or make a written copy of the annual return available for the Shareholder at the Company’s registered office.

(3) A Person may request a Public Company to provide a copy of an annual return of the Public

Company to the Person. If the Person pays the reasonable fee (if any) that the Public Company

requires, the Public Company must, within 10 days after the day the request is received or the day any required payment is made (whichever is later), either give the Person a written copy of the annual return or make a written copy of the annual return available for the Person at the Public Company’s registered office.

(4) Contravention of subsection (1), (2-1) or

(3) is punishable by a fine.

(4) Contravention of subsection (1), (2-1) or (3) is punishable by a fine.

Section 28

28. Filing of Special Resolutions and certain other Resolutions and agreements


(1) This section applies to the following Resolutions and agreements in relation to a Company:


(a) any Special Resolution;

28.         Filing of Special Resolutions and certain other Resolutions and agreements affecting a Company's Constitutional Documents


(1)         This section applies to the following Resolutions and agreements in relation to a Company’s Constitutional Documents:

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation

Paper


(b) any Ordinary Resolution or agreement agreed to by all the Shareholders of the

Company that, if not agreed to by all the

(a)         any Special Resolution;



Shareholders, would not have been effective for its purpose, unless passed as a Special Resolution;


(c) any Ordinary Resolution or agreement agreed to by all the Shareholders of a class of Shares that, if not agreed to by all those Shareholders, would not have been effective for

its purpose, unless passed by some particular majority or otherwise in some particular way;


(d) any Ordinary Resolution or agreement that effectively binds all the Shareholders of a class

of Shares, although not agreed to by all those Shareholders.


(2) A reference in subsection (1) to the Shareholders of a Company, or to the Shareholders of class of Shares in a Company, does not include a reference to the Company itself if the Company is a Shareholder, or a Shareholder of that class of Shares, only because it holds Shares as treasury Shares.


(3) A Company must file a written copy of every Resolution or agreement to which this section applies or, if a Resolution or agreement is not in Writing, a written memorandum setting out its terms with the Registrar within 15 days after the day it is passed or made.


(4) Contravention of subsection (3) is punishable by a fine.

(b)any Ordinary Resolution or agreement agreed to by all theShareholders of the Company that, if not agreed to by all the Shareholders, would not have been effective for its purpose, unless passed as a Special Resolution;


(c)any Ordinary Resolution or agreement agreed to by all the Shareholders of a class of Shares that, if not agreed to by all those Shareholders, would not have been effective for its purpose, unless passed by some particular majority or otherwise in some particular way;


(d)any Ordinary Resolution or agreement that effectively binds all the Shareholders of a class of Shares, although not agreed to by all those Shareholders.


(2)A reference in subsection (1) to the Shareholders of a Company, or to the Shareholders of class of Shares in a Company, does not include a reference to the Company itself if the Company is a Shareholder, or a Shareholder of that class of Shares, only because it holds Shares as treasury Shares.


(3)A Company must file a written copy of every Resolution or agreement to which this section applies or, if a Resolution or agreement is not in Writing, a written memorandum setting out its terms with the Registrar within 15 days after the day it is passed or made.


(4)Contravention of subsection (3) is punishable by a fine.


Section 50

50.         Prohibition of public offers by Private Companies


(1)         A Private Company must not:


(a)make an offer of its Securities to the public; or


(b)allot or agree to allot its Securities to any Person with a view to the Securities being offered to the public.


(2)         Unless the contrary is proved, an allotment or agreement to allot Securities is presumed to be made with a view to such Securities being offered to the public if an offer of the Securities (or any of them) is made to the public:

50.         Prohibition of public offers by Private Companies


(1)         A Private Company must not:


(a)make an offer of its Securities to the public; or


(b)allot or agree to allot its Securities to any Person with a view to the Securities being offered to the public.


(2)         Unless the contrary is proved, an allotment or agreement to allot Securities is presumed to be made with a view to such Securities being offered to the public if an offer of the Securities (or any of them) is made to the public:

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(a)within 6 months after the allotment or agreement to allot; or


(b)before the receipt by the Company of the whole of the consideration to be received by the Company in respect of the Securities.


(3)A Private Company does not Contravene subsection (1) if it:


(a)acts in good faith under arrangements under which it is to re-register as a Public Company before the Securities are allotted;


(b)undertakes, as part of the terms of the offer, to re-register as a Public Company within 6 months after the day the offer is first made, and the undertaking is complied with; or


(c)offers Securities by way of placement as provided in the Rules made by the AFSA.


(4)         For this section:

(a)an offer to the public includes an offer to any section of the public, however selected; and


(b)an offer is not regarded as an offer to the public if:


(i)it can be properly regarded, in all the circumstances, as not being calculated to result, directly or indirectly, in the Securities becoming available to Persons other than those receiving the offer; or


(ii)it can be properly regarded, in all the circumstances, as being made to an existing Shareholder or Employee of the Company (or a member of the Person’s immediate family), an existing holder of a Debt Security of the Company, or a trustee for any of them, and, if it is made on terms renounceable, it can only be renounced in favour of another Person who is entitled to receive that offer; or


(iii)it can be properly regarded, in all the circumstances, as being an offer for Securities to be held under an Employee Share Scheme and, if it is made on terms renounceable, it can only be renounced in favour of another Person who is entitled to receive that offer.


(5)         Contravention of subsection (1) is punishable by a fine.

(a)within 6 months after the allotment or agreement to allot; or


(b)before the receipt by the Company of the whole of the consideration to be received by the Company in respect of the Securities.


(3)A Private Company does not Contravene subsection (1) if it:


(a)acts in good faith under arrangements under which it is to re-register as a Public Company before the Securities are allotted;


(b)undertakes, as part of the terms of the offer, to re-register as a Public Company within 6 months after the day the offer is first made, and the undertaking is complied with; or


(c)offers Securities by way of placement as provided in the Rules made by the AFSA; or


(d)offers, allots or allots by agreement Securities (Debt Securities) which was entitled by the Registrar on the application.


(4)         For this section:

(a)an offer to the public includes an offer to any section of the public, however selected; and


(b)an offer is not regarded as an offer to the public if:


(i)it can be properly regarded, in all the circumstances, as not being calculated to result, directly or indirectly, in the Securities becoming available to Persons other than those receiving the offer; or


(ii)it can be properly regarded, in all the circumstances, as being made to an existing Shareholder or Employee of the Company (or a member of the Person’s immediate family), an existing holder of a Debt Security of the Company, or a trustee for any of them, and, if it is made on terms renounceable, it can only be renounced in favour of another Person who is entitled to receive that offer; or


(iii)it can be properly regarded, in all the circumstances, as being an offer for Securities to be held under an Employee Share Scheme and, if it is made on terms renounceable, it can only be renounced in favour of another

Person who is entitled to receive that offer.





(5)         Contravention of subsection (1) is punishable by a fine.


Section 65

65. Reduction of Share Capital by Private Company supported by solvency statement


(1) A Resolution for reducing Share Capital of a Private Company is supported by a solvency

statement for section 64(1) (Reduction of share capital) if:

65.         Reduction of Share Capital by Private Company supported by solvency statement


(1)         A Resolution for reducing Share Capital of a Private Company is supported by a solvency statement for section 64(1) (Reduction of share capital) if:

Category 7) of amendments set out in “Key elements                         of proposed amendments” of                     the

Consultation

Paper


(a) on a day not more than 30 days and not less than 15 days before the date the reduction of the Share Capital is to have effect, the Company has published a notice in the Appointed Publications stating the following:

(a)         on a day not more than 30 days and not less than 15 days before the date the reduction of the Share Capital is to have effect, the Company has published a notice in the Appointed Publications stating the

following:



(i) the amount of the Share Capital as most recently determined by the Company;


(i)          the amount of the Share Capital as most recently determined by the Company;



(ii) the nominal value of each Share;





(ii)         the nominal value of each Share;



(iii) the amount by which the Share Capital is to be reduced;


(iii)       the amount by which the Share Capital is to bereduced;



(iv) the date the reduction is to have effect; and


(iv)        the date the reduction is to have effect; and



(b) the notice contains a solvency statement that complies with subsection (2).


(b)         the notice contains a solvency statement that complies with subsection (2).



(2) A solvency statement is a statement by each Director of the Company that the Director:

(a) has formed the opinion, as regards the Company’s situation at the date of the statement, that there is no ground on which the Company could be found to be unable to discharge

its debts as they fall due; and


(2)A solvency statement is a statement by each Director of the Company that the Director:


(a)has formed the opinion, as regards the Company’s situation at the date of the statement, that there is no ground on which the Company could be found to be unable to

discharge its debts as they fall due; and



(b) has also formed the opinion that:





(b)         has also formed the opinion that:



(i) if the Company intended to commence its winding up within 12 months after the

date of the statement, the Company would be able discharge its debts in full within 12 months of the commencement of the winding up; or


(i)          if the Company intended to commence its winding up within 12 months after the date of the statement, the Company would be able discharge its debts in full within 12 months of the commencement of

the winding up; or



(ii) in any other case, the Company would be able to discharge its debts as they fall

due during the year immediately after the date of the statement.


(ii)         in any other case, the Company would be able to discharge its debts as they fall due during the year immediately after the

date of the statement.



(3) A Director of the Company must not

make a solvency statement mentioned in




subsection (1)(b) unless the Director has reasonable grounds for the opinion expressed in the statement. In forming the opinion, the Director must take into account all of the Company’s Liabilities (including any contingent or prospective Liabilities).

(4) Contravention of subsection (3) is punishable by a fine.


(5) If a Company reduces the amount of its Share Capital, the Company must, within 30 days after the day the reduction takes effect, file with the Registrar a copy of the notice under subsection (1)

(3)A Director of the Company must not make a solvency statement mentioned in subsection (1)(b) unless the Director has reasonable grounds for the opinion expressed in the statement. In forming the opinion, the Director must take into account all of the Company’s Liabilities (including any contingent or prospective Liabilities).

(4)Contravention of subsection (3) is punishable by a fine.


(5)If a Company reduces the amount of its Share Capital, the Company must, within 30 14 days after the day the reduction takes effect, file with the Registrar a copy of the

notice under subsection (1)


Section 74

74. Directors


(1) A Private Company must have at least 1 director and a Public Company must have at least 2 directors.


(2) A Person must not be a Director if the Person:


(a) is not a natural person; or


(b) is under 18 years old; or


(c) is disqualified from being a Director because of:


(i) having been convicted of a criminal offence, involving dishonesty or moral turpitude, in any jurisdiction in the past 10 years; or


(ii)having been found guilty of insider trading or the equivalent in any jurisdiction at any time; or


(iii)having been judged disqualified by any court; or


(iv)having been disqualified by the AFSA; or


(v) a disqualification specified in the Articles of Association; or


(d) is an undischarged bankrupt.

74. Directors


(1)A Private Company must have at least 1 director and a Public Company must have at least 2 directors.


(1-1)     A company must have at least one director who is a natural person and meets therequirements set out in subsection (2).


(2)A Person, who is a natural person, must not be a Director if the Person:


(a)is not a natural person; or [intentionally omitted]


(b)is under 18 years old; or


(c)is disqualified from being a Director becauseof:


(i)having been convicted of a criminal offence, involving dishonesty or moral turpitude, in any jurisdiction in the past 10 years; or


(ii)having been found guilty of insider trading or the equivalent in any jurisdiction at any time; or


(iii)having been judged disqualified by any court; or


(iv)having been disqualified by the AFSA; or


(v)a disqualification specified in the Articles of Association; or


(d)is an undischarged bankrupt.

Category 2) of amendments set out in “Key elements                         of proposed amendments” of                     the

Consultation Paper



(3)    A Person, who is a Body Corporate, must not be a Director, unless the Person is:

(a)Ancillary Service Provider; or

(b)a holding company.


(4) Notwithstanding subsection (3) Registrar may grant or refuse to grant a permission to a Body Corporate to be appointed as a director of the Company. Guidance issued by Registrar may impose any restrictions and conditions on granting permission.


(5)Contravention of this section is punishable by a fine.


Section 92

92. Disqualification orders


(1) Without limiting any other powers available to the Registrar, if the Registrar considers that it is in the public interest that an individual should not, without the leave of the Court, be a Director of, or in any way (whether directly or indirectly) be concerned or take part in the management of, a Company, the Registrar may apply to the Court for an order to that effect against the Person.


(2) The Court may make the order applied for if satisfied that the Person’s conduct (including, for

example, any Breach by the person of any 1 or more of the duties under sections 77 to 83 and

section 85) makes the person unfit to be concerned or take part in the management of a Company.

An order under subsection (2) may be made:

(a) in the case of a first offence, for the period, not longer than 15 years; or

(b) in the case of a repeated offence, for an unlimited period, as the Court considers appropriate.


(3) A Person must not Contravene an order under subsection (2).

(4) Contravention of subsection (4) is

punishable by a fine

92. Disqualification orders


(1) Without limiting any other powers available to the Registrar, if the Registrar considers that it is in

the public interest that an individual a Person should not, without the leave of the Court, be a Director of, or in any way (whether directly or indirectly) be concerned or take part in the management of, a Company, the Registrar may apply to the Court for an order to that effect against the Person.


(2) The Court may make the order applied for if satisfied that the Person’s conduct (including, for

example, any Breach by the person Person of any 1 or more of the duties under sections 77 to 83 and

section 85) makes the person Person unfit to be concerned or take part in the management of a Company.

An order under subsection (2) may be made:

(a) in the case of a first offence, for the period, not longer than 15 years; or

(b) in the case of a repeated offence, for an unlimited period, as the Court considers appropriate.


(3) A Person must not Contravene an order under subsection (2).

(4) Contravention of subsection (4) is

punishable by a fine

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper

Section 98

98. General provisions about meetings and votes


The following provisions apply to any General Meeting of a Company or of the holders of any class of

Shares in a Company unless the Articles of Association provide otherwise:


(a) a notice of every meeting must be given to every Shareholder entitled to receive it:

98. General provisions about meetings and votes


Thefollowing provisions applyto any General Meeting of a Company or of the holders of any class of Shares in a Company unless the Articles of Association provide otherwise:


(a)a notice of everymeeting must be given

to every Shareholder entitled to receive it:

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(i) by delivering or posting it to the Shareholder’s registered address; or


(ii)in the electronic form (if any) agreed to by the Shareholder; or


(iii)by making it available on the website (is any) agreed to by the Shareholder; or


(iv)in the other way or form (if any) agreed to by the Shareholder;


(b) except for a Company with a single Shareholder, at any General Meeting of the Company, 2 Shareholders personally present or represented by proxy are a quorum;


(c) at any meeting dealing with a variation of any class rights other than an adjourned meeting, the quorum is the number of Shareholders holding or representing by proxy at least 1/3 in nominal value of the issued and Allotted Shares of the class, and at an adjourned meeting,1 Shareholder holding Shares of the class or the Shareholder’s proxy is a quorum;


(d) any Shareholder elected by the Shareholders present at the meeting may chair the meeting;


(e) on a show of hands, every Shareholder present in person at the meeting has 1 vote and,

on a poll, every Shareholder has 1 vote for every Share held by the Shareholder.


(i)by delivering or posting it to the Shareholder’s registered address; or


(ii)in the electronic form (if any) agreed to by the Shareholder; or


(iii)by making it available on the website (is any) agreed to by the Shareholder; or


(iv)in the other way or form (if any) agreed to by the Shareholder;


(b)except for a Company with a single Shareholder, at any General Meeting of the Company, 2 Shareholders personally present or represented by proxy are a quorum;


(c)at any meeting dealing with a variation of any class rights other than an adjourned meeting, the quorum is the number of Shareholders holding or representing by proxy at least 1/3 in nominal value of the issued and Allotted Shares of the class, and at an adjourned meeting,1 Shareholder holding Shares of the class or the Shareholder’s proxy is a quorum;


(d)any Shareholder elected by the Shareholders present at the meeting may chair the meeting;


(e)on a show of hands, every Shareholder present in person at the meeting has 1 vote and, on a poll, every Shareholder has 1 vote for every Share held by the Shareholder.


(f)if practicable, voting can be arranged in any other form, determined in the

Articles of Association.


Section 104

104. Minutes and examination of minute books


(1) Every Company must ensure that minutes of all proceedings at General Meetings, meetings of the

holders of any class of Shares, and meetings of its Directors and of committees of Directors, are

entered in books kept for that purpose. The Company must ensure that the names of the Directors

104.      Minutes and examination of minute books


(1)         Every Company must ensure that minutes of all proceedings at General Meetings, meetings of the holders of any class of Shares, and meetings of its Directors and of committees of Directors, are entered in books kept for that purpose. The Company must ensure that the names of the Directors present at each of those meetings are recorded in the minutes.

Category 7) of amendments set out in “Key elements                         of proposed amendments” of                     the

Consultation Paper


present at each of those meetings are recorded in the minutes.


(2) If the minutes purport to be signed by the chair of the meeting at which the proceedings took place

or by the chair of the next meeting, the minutes are evidence of the proceedings.


(3) If minutes of a meeting have been made in accordance with this section, then, unless the contrary

is proved, the meeting is taken to have been duly called and held, and all proceedings that took

place at the meeting are taken to have duly taken place.


(4) A Company must ensure that the books containing the minutes of the General Meetings of the

Company, or of meetings of the holders of a class of Shares of the Company, are kept at the

Company’s registered office, and are open to inspection during business hours by a Shareholder

without charge.


(5) A Shareholder of a Company may, by giving the Company a Written request and paying the

reasonable amount (if any) required by the Company, ask the Company for a copy of any minutes

mentioned in subsection (4) (other than minutes of a meeting of the holders of a class of Shares if

the Shareholder is not a holder of that class of Shares). The Company must, within 7 days after the

day it receives the request and payment of any required amount, give the copy of the minutes to

the Shareholder.


(6) If a Company Contravenes subsection (4) or (5) in relation to a Shareholder of the Company, the

Registrar may, by Written notice given to the Company, direct the Company to immediately

comply with the subsection in relation to the Shareholder. If a Company is given a direction under

this subsection, the Company must comply

with the direction.

(2)If the minutes purport to be signed by the chair of the meeting at which the proceedings took place or by the chair of the next meeting, the minutes are evidence of the proceedings.


(3)If minutes of a meeting have been made in accordance with this section, then, unless the contrary is proved, the meeting is taken to have been duly called and held, and all proceedings that took place at themeeting are taken to have duly takenplace.


(4)A Company must ensure that the books containing the minutes of the General Meetings of the Company, or of meetings of the holders of a class of Shares of the Company, are kept at the Company’s registered office, and are open to inspection during business hours by a Shareholder without charge. The records mentioned in this subsection can be stored using a system of mechanical or electronic data processing or any other medium that is capable or reproducing any required information in intelligible written form within a reasonable time.


(5)A Shareholder of a Company may, by giving the Company a Written request and paying the reasonable amount (if any) required by the Company, ask the Company for a copy of any minutes mentioned in subsection (4) (other than minutes of a meeting of the holders of a class of Shares if the Shareholder is not a holder of that class of Shares). The Company must, within 7 days after the day it receives the request and payment of any required amount, give the copy of the minutes to the Shareholder.


(6)If a Company Contravenes subsection (4) or (5) in relation to a Shareholder of the Company, the Registrar may, by Written notice given to the Company, direct the Company to immediately comply with the subsection in relation to the Shareholder. If a Company is given a direction under this subsection, the Company must comply with the direction.


Section 126

126. Provisions for facilitating Company reconstruction or amalgamation


If an application is made to the Court under section 124 (Power of Company to compromise with Creditors and Shareholders) for the sanctioning of a compromise or arrangement proposed between a Company and any Persons mentioned in that section, the Court may make any orders as it considers appropriate to facilitate the compromise or arrangement, including a reconstruction of the Company, or an amalgamation

of the Company with any other Company

126.      Provisions for facilitating Company reconstruction oramalgamation


If an application is made to the Court under section 124 (Power of Company to compromise with Creditors and Shareholders) for the sanctioning of a compromise or arrangement proposed between a Company and any Persons mentioned in that section and/or a Body Corporate incorporated outside the AIFC, the Court may make any orders as it considers appropriate to facilitate the compromise or arrangement, including a reconstruction of the Company and/or a Body Corporate incorporated outside the AIFC , or an amalgamation of the Company with any other Company or a Body Corporate

incorporated outside the AIFC.

Category 6) of amendments set out in “Key elements                         of proposed amendments” of                     the

Consultation Paper

Section 148

148. Notification of change in Registered Details of Recognised Company


(1) If any of the Registered Details of a Recognised Company change, the Recognised Company must

notify the Registrar in Writing of the change within 14 days after the day the change happens and

must comply with all other requirements applying to the Recognised Company under the Rules in

relation to the change.


(2) Contravention of this section is punishable by a fine.

148. Notification of change in Registered Details of Recognised Company


(1) If any of the Registered Details of a Recognised Company change, the Recognised Company must

notify the Registrar in Writing of the change within 14 days after the day the change happens and

must comply with all other requirements applying to the Recognised Company under the Rules in

relation to the change.


(2) Contravention of this section is punishable by a fine.


(3) The change in Registered Details notice must be accompanied by the fee prescribed by

the Rules from time to time.

Category 7) of amendments set out in “Key elements                         of proposed amendments” of                     the

Consultation Paper

Section 165

165.      Direction to comply with Legislation Administered by the Registrar


(1)This section applies if a Regulated Entity, or a Regulated Relevant Person for a Regulated Entity, Fails to comply with a requirement (however expressed and including, to remove any doubt, a requirement applying for the benefit of a Person other than the Registrar of Companies):


(a)under a provision of these Regulations, the Rules or any other Legislation Administered by the Registrar; or


(b)made by the Registrar under these Regulations, the Rules or any other Legislation Administered by the Registrar.

165.      Direction to comply with Legislation Administered by the Registrar


(1)This section applies if a Regulated Entity, or a Regulated Relevant Person for a Regulated Entity, Failsfails to comply with a requirement (however expressed and including, to remove any doubt, a requirement applying for the benefit of a Person other than the Registrar of Companies):


(a)under a provision of these Regulations, the Rules or any other Legislation Administered by the Registrar; or


(b)made by the Registrar under these Regulations, the Rules or any other Legislation Administered by the Registrar.

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


(2)The Registrar of Companies may, by Written notice, direct the Regulated Entity, the Regulated Relevant Person, or another Regulated Relevant Person for the Regulated Entity, to comply with the requirement, or ensure that the requirement is complied with, within the time stated in the notice.


(3)If the Regulated Entity or Regulated Relevant Person Fails to comply with the direction under subsection (2), the Registrar of Companies may apply to the Court for 1 or more of the following orders:


(a)an order directing the Regulated Entity or Regulated Relevant Person, or another Regulated Relevant Person for the Regulated Entity, to comply with the direction or with any relevant provision of these Regulations, the Rules or any other Legislation Administered by the Registrar, or ensure that the direction is complied with, within the time stated in the order;


(b)an order directing the Regulated Entity or Regulated Relevant Person to pay any costs incurred by the Registrar or any other Person relating to:


(i)the giving of the direction by the Registrar; or


(ii)the relevant Contravention of these Regulations;


(c)         any other order that theCourt considers appropriate.


(4)         This section does not affect the operation of any other provision of these Regulations, the Rules or any other Legislation Administered by the Registrar imposing penalties in respect of a Failure to comply with a requirement to which this section applies, or any powers that the Registrar, another Person or the Court may have under any other provision of these Regulations, the Rules or any otherAIFC

Regulations or AIFC Rules.

(2)The Registrar of Companies may, by Written notice, direct the Regulated Entity, the Regulated Relevant Person, or another Regulated Relevant Person for the Regulated Entity, to comply with the requirement, or ensure that the requirement is complied with, within the time stated in the notice.


(3)If the Regulated Entity or Regulated Relevant Person Fails to comply with the direction under subsection (2), the Registrar of Companies may apply to the Court for 1 or more of the following orders:


(a)an order directing the Regulated Entity or Regulated Relevant Person, or another Regulated Relevant Person for the Regulated Entity, to comply with the direction or with any relevant provision of these Regulations, the Rules or any other Legislation Administered by the Registrar, or ensure that the direction is complied with, within the time stated in the order;


(b)an order directing the Regulated Entity or Regulated Relevant Person to pay any costs incurred by the Registrar or any other Person relating to:


(i)the giving of the direction by the Registrar; or


(ii)the relevant Contravention of these Regulations;


(c)         any other order that theCourt considers appropriate.


(4)         This section does not affect the operation of any other provision of these Regulations, the Rules or any other Legislation Administered by the Registrar imposing penalties in respect of a Failure to comply with a requirement to which this section applies, or any powers that the Registrar, another Person or the Court may have under any other provision of these Regulations, the Rules or any other AIFC

Regulations or AIFC Rules.


Section 167

167. Powers to strike off names of Companies from Register


(1) The Registrar of Companies may strike the name of a Company off the Register if the Registrar has reason to believe that:

(a) the Company is not conducting business or is not in operation;

167.      Powers to strike off names of Companies from Register


(1)The Registrar of Companies may strike the name of a Company off the Register if the Registrar has reason to believe that:


(a)the Company is not conducting business or is not in operation;

Category 1) of amendments set out in “Key elements of proposed amendments” of the Consultation

Paper


(b) the Company is Contravening these Regulations; or


(c) it is prejudicial to the interests of the AIFC for the Company to remain in the Register.


(1-1) The Registrar of Companies may conclude that a Company is not conducting business or is not in

operation where:


(a) the annual return of the Company has not been filed by the relevant date pursuant to section 26 (Annual returns); or


(b) a fee due to the Registrar has not been paid on the date due, and in each case, the Company has failed to file the annual return, pay the fee due or to respond to correspondence with the Registrar and a period of 12 months has elapsed since the date on which the annual return was due to be filed or the relevant fee was due to be paid.


(2) The Registrar of Companies may also strike the name of a Company off the Register if the

Company is being wound up in a creditors voluntary winding up and:


(a) the Registrar has reason to believe either that:


(i) no liquidator is acting; or


(ii)the affairs of the Company are fully wound up; and


(b) the returns required to be made by the liquidator have not been made for a period of at

least 6 consecutive months.


(3) In deciding whether to strike the name of a Company off the Register under subsection

(1) or (2), the Registrar of Companies comply with the Decision-making Procedures and must also:


(a) publish a notice in the Appointed Publications of the Registrar’s intention to strike the

name of the Company off the Register and dissolve the Company before doing so; and


(b) if the Company is licensed, registered or recognised by the AFSA—obtain the AFSA’s


(b)the Company is Contravening these Regulations; or


(c)it is prejudicial to the interests of the AIFC for the Company to remain in the Register.


(1-1)     The Registrar of Companies may conclude that a Company is not conducting business or is not in operation where:


(a)the annual return confirmation statement of the Company has not been filed by the relevant date pursuant to section 26 (Annual returns) 25-1 (Annual confirmation of accuracy of information on register); or


(b)a fee due to the Registrar has not been paid on the date due, and in each case, the Company has failed to file the annual return, pay the fee due or to respond to correspondence with the Registrar and a period of 12 months has elapsed since the date on which the annual return was due to be filed or the relevant fee was due to be paid.


(2)The Registrar of Companies may also strike the name of a Company off the Register if the Company is being wound up in a creditors voluntary winding up and:


(a)the Registrar has reason to believe either that:


(i)no liquidator is acting; or


(ii)the affairs of the Company are fully wound up; and


(b)         the returns required to be made by the liquidator have not been made for a period of at least 6 consecutive months.


(3)In deciding whether to strike the name of a Company off the Register under subsection (1) or (2), the Registrar of Companies comply with the Decision-making Procedures and must also:


(a)publish a notice in the Appointed Publications of the Registrar’s intention to strike the name of the Company off the Register and dissolve the Company before doing so; and


(b)if the Company is licensed, registered or recognised by the AFSA—obtain the



consent before publishing the notice under paragraph (a).


(4) If an application is made by a Company to strike the Company’s name off the Register following a voluntary winding up in accordance with the procedures under the AIFC Insolvency Regulations, the Registrar of Companies may strike the Company's name off the Register if the requirements of subsection (5) to (9) are met.


(5) An application under subsection (4)must:


(a) be made on the Company’s behalf by its Directors or a majority of them; and


(b) be in the form prescribed by the Rules.


(6) Within 7 days after the day that an application under subsection (4) is made, the applicants must give a copy of the application to every Person who, on the day the application is made, is:


(a) a Shareholder of the Company; or


(b) an Employee of the Company; or


(c) a Creditor of the Company; or


(d) a Director of the Company who is not a party to the application.


(7) An application must not be made on behalf of a Company under subsection (4):


(a) if at any time in the previous 3 months, the Company has:


(i) changed its name; or


(ii)traded or otherwise carried on business; or


(iii)made a disposal for value of property or rights held, before the disposal, for gain

in the normal course of trading; or

(iv)engaged in any other activity, other than an activity that is necessary or desirable

for the purposes of making an application under subsection (4) for concluding the affairs of the Company or complying with associated legal requirements; or


(b) at a time when any process in respect of the Company, or its property, has commenced under the AIFC Insolvency Regulations.

AFSA’s consent before publishing the notice under paragraph (a).


(4)If an application is made by a Company to strike the Company’s name off the Register following a voluntary winding up in accordance with the procedures under the AIFC Insolvency Regulations, the Registrar of Companies may strike the Company's name off the Register if the requirements of subsection (5) to (9) are met.


(5)An application under subsection (4) must:


(a)be made on the Company’s behalf by its Directors or a majority of them; and


(b)be in the form prescribed by the Rules.


(6)         Within 7 days after the day that an application under subsection (4) is made, the applicants must give a copy of the application to every Person who, on the day the application is made, is:


(a)a Shareholder of the Company; or


(b)an Employee of the Company; or


(c)a Creditor of the Company; or


(d)a Director of the Company who is not a party to the application.


(7)An application must not be made on behalf of a Company under subsection (4):


(a)if at any time in the previous 3 months, the Companyhas:


(i)changed its name; or


(ii)traded or otherwise carried on business; or


(iii)made a disposal for value of property or rights held, before the disposal, for gain in the normal course of trading; or


(iv)engaged in any other activity, other than an activity that is necessary or desirable for the purposes of making an application under subsection (4) for concluding the affairs of the Company or complying with associated legal requirements; or



(8) The Registrar of Companies must not strike the Company’s name off the Register under subsection (4) unless the Registrar has published a notice in the Appointed Publications, containing the matters required by subsection (9), and at least 3 months have elapsed since the day of publication

of the notice.

(9) A notice under subsection (8) must:


(a) state that the Registrar of Companies may exercise the power to strike the Company’s name off the Register; and


(b) invite any Person to show cause why that should not be done.


(10)If the name of a Company is struck off the Register under subsection (1), (2) or (4), the Liability of every Director and Shareholder of the Company continues and may be enforced as if the Company had not beendissolved.

(11)If the Registrar of Companies strikes the name of the Company off the Register, the Company must be dissolved.


(12)If the name of a Public Company is struck off the Register under this section, the Company must maintain its books and Records for a period of 6 years after the day its name is struck off the Register.

(b)         at a time when any process in respect of the Company, or its property, has commenced under the AIFC Insolvency Regulations.


(8)The Registrar of Companies must not strike the Company’s name off the Register under subsection (4) unless the Registrar has published a notice in the Appointed Publications, containing the matters required by subsection (9), and at least 3 months have elapsed since the day of publication of the notice.

(9)A notice under subsection (8) must:


(a)state that the Registrar of Companies may exercise the power to strike the Company’s name off the Register; and


(b)invite any Person to show cause why that should not be done.

(10)If the name of a Company is struck off the Register under subsection (1), (2) or (4), the Liability of every Director and Shareholder of the Company continues and may be enforced as if the Company had not beendissolved.

(11)If the Registrar of Companies strikes the name of the Company off the Register, the Company must be dissolved.


(12)If the name of a Public Company is struck off the Register under this section, the Company must maintain its books and Records for a period of 6 years after the day

its name is struck off the Register.


Section 182,

sub- section (4), para (c)

(c)

that the Rules do not change, or significantly change, the policy intended to be give effect to by these Regulations and the Rules or any other AIFC Regulations or AIFC Rules.

(c)

that the Rules do not change, or significantly change, the policy intended to be give effect to by these Regulations and the Rules or any other AIFC Regulations or AIFC Rules.

Category 7) of amendments set out in “Key elements of proposed amendments” of the Consultation

Paper

Section 181

181. Power to adopt Rules etc.

(1) The Board of Directors of the AFSA may adopt Rules prescribing matters:


(a) required or permitted by these Regulations, or any other AIFC Regulations that are Legislation Administered by the Registrar, to be prescribed by the Board by the Rules; or


(b) necessary or convenient to be prescribed for carrying out or giving effect to these

181. Power to adopt Rules etc.

(1) The Board of Directors of the AFSA may adopt Rules prescribing matters:


(a) required or permitted by these Regulations, or any other AIFC Regulations that are Legislation Administered by the Registrar, to be prescribed by the Board by the Rules; or


(b) necessary or convenient to be prescribed for carrying out or giving effect to these

Category 3) of amendments set out in “Key elements of proposed amendments” of the Consultation Paper


Regulations, the Rules or any other Legislation Administered by the Registrar.


(2) However, the Board may not adopt Rules under this section on matters related to the regulation of financial services and related operations in the AIFC.


(3) Without limiting subsection (1), the Board may adopt Rules:


(a) with respect to any matters relating to the Registrar’s Objectives or Functions; or


(b) to facilitate the administration of, or further the purposes of, these Regulations or any Legislation Administered by the Registrar; or


(c) prescribing model articles of association; or


(d) with respect to the procedures for the imposition or recovery of fines, including any circumstances in which the procedures do not apply to the imposition of a fine; or


(e) setting limits for fines and other penalties that may be imposed for Contraventions of these Regulations; or


(f) the giving of waiver and modification notices under section 195 (Waivers and modifications of certain provisions), including the procedures for the making of application for, or giving of, notices; or


(g) with respect to any of the following:

(i) forms, procedures and requirements under these Regulations, the Rules or any other Legislation Administered by the Registrar;


(ii)the keeping of public registers and databases;


(iii)the conduct of the Registrar and the Registrar’s officers, employees, delegates and agents in relation to the Exercise of Functions, including discretionary Functions

and the conduct of investigations and hearings.


(4) Rules adopted by the Board may incorporate standards and codes of practice by reference. A standard or code of practice

incorporated into Rules adopted by the Board

Regulations, the Rules or any other Legislation Administered by the Registrar.


(2) However, the Board may not adopt Rules under this section on matters related to the regulation of financial services and related operations in the AIFC.


(3) Without limiting subsection (1), the Board may adopt Rules:


(a) with respect to any matters relating to the Registrar’s Objectives or Functions; or


(b) to facilitate the administration of, or further the purposes of, these Re