AGN 222.1 - Extended Licensed EntityAGN 222.1 - Extended Licensed Entity

AGN 222.1 - Extended Licensed Entity

1. APRA recognises that most ADIs regularly conduct some of their activities using subsidiaries and special purpose vehicles which are often established to satisfy tax requirements. While they involve separate legal entities, they are to all intents and purposes operated as a division of an ADI.
2. Subject to the specific requirements set out in paragraph 4 below, APRA may deem a subsidiary of an ADI (other than an entity regulated directly by APRA or by a foreign equivalent) to be part of the ADI itself for the purposes of measuring the ADI’s exposures to related entities. Essentially, this requires APRA to adopt a “substance over form” approach and to “look through” the legal structure involved. Under this approach, an ADI and all its eligible subsidiary entities would be “consolidated” to form an “Extended Licensed Entity” (ELE) for measuring the ADI’s exposures to all other related entities. Accordingly, the ADI’s exposures to these subsidiaries (including equity investments) are exempted from the ADI’s intra-group exposure limits prescribed by APRA.
3. An ADI may apply to APRA to have one or more subsidiaries approved as part of its ELE. In practice, APRA will agree with the ADI on a list of entities that are eligible to form part of the ELE. An ADI is required to inform APRA as soon as it becomes aware that a member of the ELE no longer meets the criteria set out in this Guidance Note.
4. In deciding whether to approve a subsidiary of an ADI as eligible for inclusion within the ELE, APRA will have regard to the ADI’s extent of control over, and integration with, the subsidiary as well as the existence of any third-party liabilities of the subsidiary. Potential complications under a scenario where underlying asset holdings must be liquidated during financial stress will also be considered. Essentially, the following criteria should be met in respect of the relationship between the ADI and the subsidiary:

(a) the subsidiary should be wholly owned by the ADI, with a board of directors that is composed entirely of members of the ADI’s Board or senior management;

(b) the ADI has complete information on the individual assets, liabilities and off-balance sheet positions of the subsidiary. The ADI should be able to furnish stand-alone accounting records for the subsidiary, and provide APRA with full and unfettered access to this and any other information at any time (including during on-site visits);

(c) the ADI is unrestricted in its ability to control the composition of the subsidiary’s assets and liabilities as it sees fit. The ADI should demonstrate to APRA that there are no legal or regulatory barriers (including cross-border issues where the subsidiary is not incorporated or established in Australia) to the transfer of the assets/funds back to the ADI. There should be no legal obstacle to the ADI instituting a wind-up of the subsidiary at any time and placing the remaining assets on the balance sheet of the ADI;