Equity

1. Equity exposures must be defined on the basis of the economic substance of the instrument. Equity exposures include both direct and indirect ownership interests,[11] whether voting or non-voting, in the assets and income of entities, including commercial enterprises and financial institutions. An instrument is considered to be an equity exposure if it meets the following criteria:
   1. it is irredeemable, in that the return of invested funds can be achieved only by the sale of the investment, the sale of the rights to the investment or by the liquidation of the issuer;
   2. it does not embody an obligation of the issuer; and
   3. it conveys a residual claim on the assets or income of the issuer.
2. Debt obligations and other securities, units in trusts, derivatives or other instruments which are structured for the purpose, or have the effect, of conveying the economic substance of equity ownership must be treated as equity exposures. This includes options and warrants on equities and short positions in equity securities. In addition, if a debt instrument is convertible into equity at the option of an ADI, it should be treated by the ADI as equity on conversion. If such an instrument is convertible at the option of the issuer or automatically by the terms of the instrument, it should be treated by the ADI as equity from inception.
3. Equities that are recorded as a loan but arise from a debt/equity swap made as part of the orderly realisation or restructuring of the debt must be treated as an equity exposure.
4. Instruments with a return directly linked to equities must be treated as equity exposures.
5. An ADI must risk-weight equity exposures that are not required to be deducted from Regulatory Capital under APS 111 at:
   1. 250 per cent if the equity exposure is listed on a recognised exchange, or where the equity exposure is to the ADI’s banking or insurance subsidiary at Level 1;[12] and
   2. 400 per cent if the equity exposure is not listed on a recognised exchange.