Insurance (prudential standard) determination No. 15 of 2008 - Prudential Standard GPS 111 - Capital Adequacy: Level 2 Insurance Groups
Equity exposuresEquity exposures
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Equity exposures
- Equity exposures include ownership interests, both direct and indirect,[21] whether voting or non-voting, in the assets and income of entities, including commercial enterprises and financial institutions. Equity exposures are defined on the basis of their economic substance and include instruments that meet the following criteria:
(a) the instrument is irredeemable in that the realisation 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; and
(b) the instrument does not embody an obligation of the issuer.
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Debt obligations and other securities, units in trusts derivatives or other instruments structured with the intent or 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 a Level 2 insurance group, it should be deemed 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 categorised by the Level 2 insurance group as equity from inception.
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Instruments with returns directly linked to equities should be characterised as equity exposures.
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Equity instruments that are structured with the intent of conveying the economic substance of debt holdings are not required to be treated as equity exposures.