Entire Section
Displaced Commercial Risk
IFR 5.4.4 IFR 5.4.4
An
Authorised Firm Managing a PSIA , which is anUnrestricted PSIA , must calculate aDisplaced Commercial Risk Capital Requirement in respect of itsPSIA 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. AnAuthorised Firms Managing a PSIA , on an unrestricted basis is subject to a unique type of risk referred to asDisplaced Commercial Risk . This risk reflects the fact that anAuthorised Firm may be liable to find itself under commercial pressure to pay a rate of return to itsPSIA holders which is sufficient to induce those investors to maintain their funds with theAuthorised 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, theAuthorised 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 theAuthorised Firm's commercial position (or, in an extreme case, its solvency). Thus, part of the commercial risk attaching to the returns attributable to thePSIA is, in effect, transferred to the shareholders' funds or theAuthorised 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 theAuthorised Firm in certain circumstances may provide for the shortfalls.2. In anUnrestricted PSIA , the account holder authorises theAuthorised Firm to invest the account holder's funds in a manner which theAuthorised 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, theAuthorised Firm can commingle the investment account holder's funds with its own funds or with other funds which theAuthorised Firm has the right to use. The investment account holders and theAuthorised Firm generally participate in the returns on the invested funds.3. In aRestricted PSIA , the account holder imposes certain restrictions as to where, how and for what purpose the funds are to be invested. Further, theAuthorised 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 ofRestricted PSIAs are managed by theAuthorised Firm which does not have the right to use or dispose of the investments except within the conditions of the contract.4. AnAuthorised Firms undertakingIslamic Financial Business is also exposed to fiduciary risk which arises where the terms of the contract between theAuthorised Firm and the investor are breached and where theAuthorised Firm does not act in compliance with Shari'a.5. AnAuthorised Firm is required to apply theCapital 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) AnAuthorised Firm's Displaced Commercial Risk Capital Requirement is based on 35% of theCRCOM andMarket Risk capital requirement of assets funded byUnrestricted PSIA holders, and is calculated using the following formula:
PSIACOM = [PSIACOMcredit + PSIACOMmarket] × 35%.(2) PSIACOM is theDisplaced Commercial Risk Capital Requirement ;(3) PSIACOMcredit is theCredit Risk capital requirement for assets funded byUnrestricted PSIA holders and is calculated in accordance with Rules in part 3 of chapter 4 of PIB; and(4) PSIACOMmarket is theMarket Risk capital requirement for assets funded byUnrestricted 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]