Displaced Commercial Risk
IFR 5.4.4 IFR 5.4.4
Authorised Firm Managing a PSIA, which is an Unrestricted PSIA, must calculate a Displaced Commercial Risk Capital Requirementin respect of its PSIAbusiness.
IFR 5.4.4 Guidance1. An
Authorised Firms Managing a PSIA, on an unrestricted basis is subject to a unique type of risk referred to as Displaced Commercial Risk. This risk reflects the fact that an Authorised Firmmay be liable to find itself under commercial pressure to pay a rate of return to its PSIAholders which is sufficient to induce those investors to maintain their funds with the Authorised Firm, rather than withdrawing them and investing them elsewhere. If this "required" rate of return is higher than that which would be payable under the normal terms of the investment contract, the Authorised Firmmay be under pressure to forgo some of the share of profit which would normally have been attributed to its shareholders (e.g., part of the Mudarib's share). Failure to do this might result in a volume of withdrawals of funds by investors large enough to jeopardise the Authorised Firm'scommercial position (or, in an extreme case, its solvency). Thus, part of the commercial risk attaching to the returns attributable to the PSIAis, in effect, transferred to the shareholders' funds or the Authorised Firm'sown capital. It also reflects situations whereby an investor may be permitted to exit from an asset pool at par while the fair value of such assets may be lower than their carrying amounts and where the Authorised Firmin certain circumstances may provide for the shortfalls.2. In an Unrestricted PSIA, the account holder authorises the Authorised Firmto invest the account holder's funds in a manner which the Authorised Firmdeems appropriate without specifying any restrictions as to where, how or for what purpose the funds should be invested, provided that they are Shari'a compliant. Under this arrangement, the Authorised Firmcan commingle the investment account holder's funds with its own funds or with other funds which the Authorised Firmhas the right to use. The investment account holders and the Authorised Firmgenerally participate in the returns on the invested funds.3. In a Restricted PSIA, the account holder imposes certain restrictions as to where, how and for what purpose the funds are to be invested. Further, the Authorised Firmmay be restricted from commingling its own funds with the restricted investment account funds for purposes of investment. In addition, there may be other restrictions that the investment account holders may impose. In other words, the funds provided by holders of Restricted PSIAsare managed by the Authorised Firmwhich does not have the right to use or dispose of the investments except within the conditions of the contract.4. An Authorised Firmsundertaking Islamic Financial Businessis also exposed to fiduciary risk which arises where the terms of the contract between the Authorised Firmand the investor are breached and where the Authorised Firmdoes not act in compliance with Shari'a.5. An Authorised Firmis required to apply the Capital Requirementsspecified in chapters PIB 4 and PIB 5 to any other business it carries on.
IFR 5.4.5(1) An
Authorised Firm's Displaced Commercial Risk Capital Requirementis based on 35% of the CRCOMand Market Riskcapital requirement of assets funded by Unrestricted PSIAholders, and is calculated using the following formula:
PSIACOM = [PSIACOMcredit + PSIACOMmarket] × 35%.(2) PSIACOM is the
Displaced Commercial Risk Capital Requirement;(3) PSIACOMcredit is the Credit Riskcapital requirement for assets funded by Unrestricted PSIAholders and is calculated in accordance with Rules in part 3 of chapter 4 of PIB; and(4) PSIACOMmarket is the Market Riskcapital requirement for assets funded by Unrestricted PSIAholders and is calculated in accordance with Rules in PIB chapter 5.