4.1 Application of Chapter 4

This Chapter does not apply to a PRU Investment Firm that is an Externally Regulated PRU Investment Firm.

4.2 Liquid Assets requirement

(1) A PRU Investment Firm must have, at all times, Liquid Assets whose value is at least equal to 25% of the firm’s Annual Operating Expenditure (as defined in Rule 4.4).

(2) If at any time the AFSA considers that because of the nature, scale and complexity of a particular PRU Investment Firm's business, or its risk profile, it is appropriate to require the PRU Investment Firm to hold a greater amount of Liquid Assets than is required by Rule 4.2(1), the AFSA may require the PRU Investment Firm to hold Net Liquid Assets to a specified higher percentage of its Annual Operating Expenditure, and the PRU Investment Firm must comply with that requirement.

4.3 Calculating Liquid Assets

(1) Subject to paragraph (2), the "Liquid Assets" of a PRU Investment Firm means each of the following, to the extent it is beneficially owned by the PRU Investment Firm free from any security interest or other claim of any third party, other than a banker's lien or custodian's lien arising in the ordinary course of business:

• (a) cash in hand;
• (b) money deposited with a regulated bank or deposit-taker which has a short-term credit rating of A1 or P1 (or equivalent) and above from an Approved ECAI;
• (c) demand deposits with a tenor of 1 year or less with a bank or deposit-taker in (b);
• (d) time deposits with a tenor of 1 year or less which have an option to redeem the deposit at any time; in such cases, the deposit amount eligible to be included as Liquid Assets must be calculated as net of any costs associated with such early redemption;
• (e) cash receivable from a regulated clearing house and cash deposits with such clearing houses, other than any fees or contributions to guarantee or reserve funds of such clearing houses; and
• (f) any other asset which may be approved by the AFSA as comprising a Liquid Asset for the purpose of this Rule.

(2) For the purpose of paragraph (1), Liquid Assets do not include:

• (a) any investment, asset or deposit which has been pledged as security or collateral for any obligations or liabilities assumed by it or by any other Person; or
• (b) cash held in Client Money or Insurance Money accounts.

4.4 Calculating Annual Operating Expenditure

(1) Subject to Rule 4.4(2), a PRU Investment Firm's Annual Operating Expenditure at any time, which shall be calculated as at the end of the most recently ended financial year for which audited accounts are available, is the total of:

• (a) the expenses reported in those audited annual accounts of the PRU Investment Firm for the period of the financial year covered by those accounts that arose in the normal course of the firm’s business arising from PRU Investment Business or Non-PRU(INV) Investment Business (including from any such activities carried out by a branch of the PRU Investment Firm in any other jurisdiction); plus
• (b) the amount by which the Governing Body, acting reasonably, expects the corresponding annual operating expenses in any financial year after the financial year covered by those accounts to exceed the amount in paragraph (a).

(2) In the period between being authorised as a PRU Investment Firm and the date of publication of the audited accounts in respect of its first full financial year as a PRU Investment Firm, a PRU Investment Firm must calculate its Annual Operating Expenditure using its budgeted or forecast accounts for its first twelve months that it submitted to the AFSA as part of its application for authorisation as a PRU Investment Firm, and must make adjustments to take into account the amount by which the Governing Body, acting reasonably, expects the annual operating expenses to exceed the amounts included in those budgeted or forecast accounts.