Entire Section

  • Displaced Commercial Risk

    • IFR 5.4.4 IFR 5.4.4

      An Authorised Firm Managing a PSIA, which is an Unrestricted PSIA, must calculate a Displaced Commercial Risk Capital Requirement in respect of its PSIA business.

      Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
      [Amended] DFSA RM115/2012 (Made 15th October 2012). [VER5/12-12]

      • IFR 5.4.4 Guidance

        1. 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 Firm may be liable to find itself under commercial pressure to pay a rate of return to its PSIA holders 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 Firm may 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's commercial position (or, in an extreme case, its solvency). Thus, part of the commercial risk attaching to the returns attributable to the PSIA is, in effect, transferred to the shareholders' funds or the Authorised Firm's own 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 Firm in certain circumstances may provide for the shortfalls.
        2. In an Unrestricted PSIA, the account holder authorises the Authorised Firm to invest the account holder's funds in a manner which the Authorised Firm deems 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 Firm can commingle the investment account holder's funds with its own funds or with other funds which the Authorised Firm has the right to use. The investment account holders and the Authorised Firm generally 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 Firm may 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 PSIAs are managed by the Authorised Firm which does not have the right to use or dispose of the investments except within the conditions of the contract.
        4. An Authorised Firms undertaking Islamic Financial Business is also exposed to fiduciary risk which arises where the terms of the contract between the Authorised Firm and the investor are breached and where the Authorised Firm does not act in compliance with Shari'a.
        5. An Authorised Firm is required to apply the Capital Requirements specified in chapters PIB 4 and PIB 5 to any other business it carries on.
        Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
        [Amended] DFSA RM115/2012 (Made 15th October 2012). [VER5/12-12]

    • IFR 5.4.5

      (1) An Authorised Firm's Displaced Commercial Risk Capital Requirement is based on 35% of the CRCOM and Market Risk capital requirement of assets funded by Unrestricted PSIA holders, 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 Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with Rules in part 3 of chapter 4 of PIB; and
      (4) PSIACOMmarket is the Market Risk capital requirement for assets funded by Unrestricted PSIA holders and is calculated in accordance with Rules in PIB chapter 5.
      Derived from DFSA RM69/2010 (Made 1st March 2010). [VER1/03-10]
      [Amended] DFSA RM115/2012 (Made 15th October 2012). [VER5/12-12]