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  • PIB 4 PIB 4 Credit Risk

    • Introduction

      • PIB 4 Guidance

        1. PIB chapter 4 deals with the prudential requirements relating to the management of Credit Risk by an Authorised Firm. Credit Risk refers to risk of incurring losses due to failure on the part of a borrower or a counterparty to fulfil their obligations in respect of a financial transaction.
        2. This chapter aims to ensure that an Authorised Firm holds sufficient regulatory capital of acceptable quality so that it can absorb unexpected losses arising out of its Credit Risk exposures, should the need arise and that it continues to operate in a sustainable manner.
        3. This chapter requires an Authorised Firm to:
        a. appropriately apply a risk-weight to all on-balance sheet assets and off-balance sheet exposures for capital adequacy purposes. A risk-weight is based on a Credit Quality Grade aligned with the likelihood of counterparty default;
        b. calculate the Credit Risk Capital Requirement for its on-balance sheet assets and off-balance sheet exposures; and
        c. reduce the Credit Risk Capital Requirement for its on-balance sheet assets and off-balance sheet exposures where the exposure is covered fully or partly by some form of eligible Credit Risk mitigant.
        4. PIB Appendix 4 provides detailed requirements, parameters, calculation methodologies and formulae in respect of the primary requirements outlined in PIB chapter 4.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 4 Part 1 PIB 4 Part 1 — Application

      • PIB 4.1 PIB 4.1 Application

        • PIB 4.1.1 PIB 4.1.1

          This chapter applies to an Authorised Firm in Category 1, 2, 3A or 5.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.1.1 Guidance

            1. This chapter imposes systems and controls pertaining to Credit Risk, and prescribes the manner of calculation of the Credit Risk Capital Requirement (also referred to in this module as CRCOM).
            2. Rules PIB 3.8.2 and PIB 3.8.3 provide that the CRCOM is a component in the calculation of the overall Risk Capital Requirement of an Authorised Firm, and that the CRCOM is to be calculated in accordance with this PIB chapter 4.
            3. The Rules in PIB section 4.8 provide that the Authorised Firm's CRCOM is 8% of the Credit RWA of the firm, which in turn is calculated as the sum of:
            a. the RWA for Credit Risk Exposures (CR Exposures); and
            b. the RWA for securitisation Exposures (SE Exposures).
            4. This chapter sets out the manner in which each of those components must be calculated, monitored and controlled by an Authorised Firm.
            5. In addition to complying with the applicable Rules in this chapter, an Authorised Firm investing in or holding Islamic Contracts whether or not for the purpose of a PSIA will need to take account of the provisions under IFR Rules IFR 5.4.6 and IFR 5.4.7 to calculate the Credit Risk for those Islamic Contracts.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • PIB 4 Part 2 PIB 4 Part 2 — Credit Risk Systems and Controls

      • PIB 4.2 PIB 4.2 Application of this part

        • PIB 4.2.1

          This part applies to an Authorised Firm in Category 1, 2, 3A or 5 with respect to both its Non-Trading Book and Trading Book transactions.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.3 PIB 4.3 Credit Risk Management Systems

        • PIB 4.3.1 PIB 4.3.1

          An Authorised Firm must implement and maintain comprehensive Credit Risk management systems which:

          (a) are appropriate to the firm's type, scope, complexity and scale of operations;
          (b) enable the firm to effectively identify, assess, monitor and control Credit Risk and to ensure that adequate Capital Resources are available to cover the risks assumed; and
          (c) ensure effective implementation of the Credit Risk strategy and policy.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.1 Guidance

            1. Credit Risk is the risk that a borrower or Counterparty fails to meet its obligations. It exists in both the Non-Trading Book and the Trading Book, and both on and off the balance sheet of an Authorised Firm.
            2. Obviously, Credit Risk arises from loans but there are other sources of Credit Risk such as.
            a. trade finance and acceptances;
            b. interbank transactions;
            c. commitments and guarantees;
            d. interest rate, foreign exchange and Credit Derivatives (including swaps, options, forward rate agreements and financial futures);
            e. bond and equity holdings; and
            f. settlement of transactions.
            3. The objective of the Credit Risk management system must be to ensure that every Authorised Firm holds adequate capital to cover Credit Risk and absorb any potential losses arising from that risk. Since Authorised Firms need to provide credit as part of their usual business, this needs to be achieved by effectively managing the Credit Risk assumed by the Authorised Firm as part of its credit business.
            4. Failure to manage Credit Risk effectively could cause an Authorised Firm to face a situation of inadequate capital, which would threaten its safety and soundness. Such problems normally arise from:
            a. lax credit standards for borrowers and Counterparties;
            b. poor portfolio risk management; and
            c. failure to identify in good time changes in economic or other conditions that may impair the financial strength of borrowers and Counterparties.
            5. Therefore, it is essential for Authorised Firms involved in the business of providing credit to design, implement and maintain comprehensive and effective systems to manage Credit Risk.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.2

          The Credit Risk management framework of an Authorised Firm must have at least the following principal elements effectively implemented to ensure that the Credit Risk Exposures of the Authorised Firm are of a sufficiently good quality:

          (a) an appropriate Credit Risk environment, defined by a documented Credit Risk strategy and a documented Credit Risk policy;
          (b) application of the Credit Risk strategy and policy, where appropriate, on a consolidated basis and at the level of individual subsidiaries;
          (c) sound processes for assuming and managing Credit Risk;
          (d) prudent lending controls and limits, including policies and processes for monitoring Exposures in relation to limits, and approvals of exceptions to limits;
          (e) adequate appropriately skilled human resources to manage the Credit Risk function;
          (f) independence of credit approval and review functions from credit initiation functions to avoid any real or potential conflicts of interest;
          (g) prudent procedures for approving credits, defined by a documented credit procedures manual;
          (h) effective systems for credit administration, measurement and monitoring; and
          (i) adequate controls over Credit Risk.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.3 PIB 4.3.3

          (1) An Authorised Firm must ensure that its Governing Body retains responsibility for the Credit Risk management framework and ensure it is appropriate for the nature, scale and complexity of operations, in the context of prevailing market and macro-economic conditions.
          (2) An Authorised Firm must ensure that its senior management or an appropriate designated body, regularly reviews and understands the implications as well as the limitations of the risk management information that they receive from the Credit Risk management function, in order to evaluate the suitability and effectiveness of such information in enabling them to provide effective oversight over the Credit Risk management function.
          (3) An Authorised Firm must ensure that its Governing Body regularly reviews and understands the implications as well as the limitations of Credit Risk management information and reports presented to it, to ensure that the contents and the format of such reports are suitable for effective Governing Body oversight.
          (4) An Authorised Firm must ensure that its Governing Body is responsible for carrying out regular stress testing on the credit portfolio which is appropriate for the nature, scale and complexity of the Credit Risks assumed by the Authorised Firm. An Authorised Firm must ensure that its Governing Body annually reviews the stress scenarios and takes action to address any perceived issues arising from those reviews.
          (5) An Authorised Firm must establish and enforce internal controls and practices so that deviations from policies, procedures, limits and prudential guidelines are promptly reported to the appropriate level of management.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.3 Guidance

            1. An Authorised Firm may structure its credit processes and Credit Risk management function in a manner which suits its or its Group's internal organisational structure, culture and internal practices, provided the key functions and components relevant to Credit Risk management, as mentioned above, are present, and there must be adequate segregation of functions responsible for critical Credit Risk management processes. In particular, the credit initiation function must be independent of the credit approval and review functions to avoid any potential conflicts of interest. In cases where an Authorised Firm finds it necessary to delegate small lending limits to staff in the front office for operational needs, there must be adequate safeguards, e.g. independent review of credits granted, to prevent abuse.
            2. An Authorised Firm's senior management or an appropriately delegated body (such as a credit committee) should be responsible for effectively implementing the Credit Risk strategy and policy approved by the Governing Body of the Authorised Firm. Senior management or such a credit committee will need to establish adequate procedures to identify, quantify, monitor and control the Credit Risk inherent in the Authorised Firm's activities and at the level of both the overall portfolio and individual borrowers/Counterparties.
            3. The appropriate level at which credit decisions are taken will vary according to the type of credit offered and the size and structure of the Authorised Firm. For some Authorised Firms, a credit committee may be appropriate, with formal terms of reference laid down. In other Authorised Firms, individuals may be given pre-assigned authority limits. It will usually be appropriate for the final credit approval authority to be given by staff reporting independently from those staff interacting with clients.
            4. As part of its stress testing programme for Credit Risk measurement, an Authorised Firm should take into account the realistic recoveries available from security or Collateral under stressed market and macro-economic conditions.
            5. PIB Rule 4.3.3 (3) requires the Governing Body of an Authorised Firm to review the management information reports presented to it by the senior management of that firm and assess the reports in respect of their utility and effectiveness in enabling the Governing Body to effectively discharge their responsibilities towards effective oversight of the firm and its credit risk management.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.4 PIB 4.3.4

          An Authorised Firm must also consider whether it is prudent to set out specific provisioning requirements for country and transfer risks to which it is exposed.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.4 Guidance

            Guidance on country and transfer risk Exposure is set out in PIB section A4.1 (Credit Risk systems and controls) in PIB App4.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.5 PIB 4.3.5

          Where an Authorised Firm avails itself of Credit Risk mitigations, the Authorised Firm must have mechanisms in place to regularly assess the net realisable value of such mitigations taking into account prevailing market conditions.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.5 Guidance

            1. PIB section 4.13 sets out the principles and methodologies for the recognition of Credit Risk mitigation in the calculation of Credit RWA.
            2. Further Guidance on Credit Risk systems and controls (including Credit Risk mitigation), and on the specific areas which the Credit Risk policy should cover, is set out in PIB section A4.1.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.4 PIB 4.4 Credit Risk Strategy, Policy, and Procedures Manual

        • Credit Risk Strategy

          • PIB 4.4.1 PIB 4.4.1

            (1) An Authorised Firm must implement and maintain a Credit Risk strategy, which prescribes its stated degree of risk tolerance, level of capital available for credit activities, business strategy for credit activities and Credit Risk management approach.
            (2) The strategy must be:
            (a) documented;
            (b) approved by the Governing Body; and
            (c) regularly reviewed and updated by the Authorised Firm at periodic intervals and at least annually, as appropriate to the nature, scale and complexity of its activities.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.4.1 Guidance

              1. An Authorised Firm's Credit Risk strategy should reflect the aim to achieve sound credit quality while ensuring profit and business growth. Therefore the Credit Risk strategy should address the Authorised Firm's approach towards the decision on an acceptable level of risk/reward relationship, after taking into account resource and capital costs.
              2. An Authorised Firm's Credit Risk strategy should allow for economic cycles and their effects on the credit portfolio during different stages of an economic cycle. For example, it should cater for a higher incidence of defaults in the personal loan and credit card portfolios in times of economic recession.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Risk Policy

          • PIB 4.4.2

            (1) An Authorised Firm must implement and maintain a Credit Risk policy which prescribes all the essential elements of the Credit Risk management system and associated processes.
            (2) The policy must be:
            (a) documented;
            (b) approved by the Governing Body; and
            (c) regularly reviewed and updated by the Authorised Firm at periodic intervals and at least annually, as appropriate to the firm's current financial performance, credit market conditions in its main markets and its Capital Resources position as well the firm's nature, scale and complexity of its activities.
            (3) Any changes to the Credit Risk policy and how exceptions to the policy will be dealt with must be approved by the Governing Body or an appropriately delegated committee of senior management (such as a credit committee).
            (4) An Authorised Firm with one or more branches outside the DIFC must implement and maintain Credit Risk policies adapted to each local market and its regulatory conditions.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.3

            The Credit Risk policy must:

            (a) be consistent with the approved Credit Risk strategy, considering a range of factors, including but not limited to an approved degree of risk tolerance, capital allocated to Credit Risks, business strategy and market conditions in its main credit markets;
            (b) provide sound, well-defined Credit Risk norms and criteria for approval of credit applications;
            (c) clearly specify the Exposure limits, product types, business segments, nature of target borrowers and the nature of Credit Risk that the Authorised Firm wishes to incur;
            (d) set out, where appropriate, the amounts and terms and conditions under which Counterparties or clients may be eligible or ineligible for credit;
            (e) include minimum information that is required to be obtained for processing an application for credit;
            (f) include well defined criteria and policies for approving new Exposures as well as renewing and refinancing existing Exposures, identifying the appropriate approval authority for the size and complexity of the Exposures;
            (g) include effective credit administration policies, including continued analysis of a borrower's ability and willingness to repay under the terms of the debt, monitoring of documentation, legal covenants, contractual requirements and Collateral, and a classification system that is consistent with the nature, size and complexity of the Authorised Firm's activities or, at the least, with the asset grading system prescribed in PIB Rule 4.5.4;
            (h) include comprehensive policies for reporting Exposures on an on-going basis;
            (i) include comprehensive policies for identifying and managing problem assets;
            (j) include a provisioning policy approved by the Governing Body which ensures that all loans are promptly and prudently provided for;
            (k) set out limits and approval processes involved for the approval of credit facilities that can be approved by the delegated authorities, and stipulate that the Governing Body retains responsibility for the governance of such limits;
            (l) require that major Credit Risk Exposures exceeding a specified amount or at a minimum all Large Exposures of the Authorised Firm are approved by the Authorised Firm's senior management or its designated body like credit committee; and
            (m) require that all Credit Risk Exposures that are especially risky or inconsistent with the approved credit strategy of the Authorised Firm are approved by the Authorised Firm's senior management or its designated body such as a credit committee.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.4

            In relation to conflicts of interest and Related Person transactions, the policy must:

            (a) set out adequate procedures for handling conflicts of interest relating to the provision and management of credit, including measures to prevent any Person directly or indirectly benefiting from the credit being part of the process of granting or managing the credit;
            (b) subject to PIB Rule 4.4.5, prohibit Exposures to Related Persons on terms that are more favourable than those available to Persons who are not Related Persons; and
            (c) if Exposures to Related Persons are allowed on terms which are no more favourable than those available to Persons who are not Related Persons, set out procedures that:
            (i) require such Exposures, and any write-off of such Exposures, exceeding specific amounts or otherwise posing special risks to the Authorised Firm, to be made subject to the prior written approval of the firm's Governing Body or the Governing Body's delegate; and
            (ii) exclude Persons directly or indirectly benefiting from the grant or write off of such Exposures being part of the approval process.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.5 PIB 4.4.5

            The prohibition in PIB Rule 4.4.4(b) does not apply to providing credit to a Related Person under a credit policy on terms (such as for credit assessment, tenor, interest rates, amortisation schedules and requirements for Collateral) that are more favourable than those on which it provides credit to Persons who are not Related Persons, provided the credit policy:

            (a) is an Employee credit policy that is widely available to Employees of the Authorised Firm;
            (b) is approved by the Authorised Firm's Governing Body or the Governing Body's delegate;
            (c) clearly sets out the terms, conditions and limits (both at individual and aggregate levels) on which credit is to be provided to such Employees; and
            (d) requires adequate mechanisms to ensure on-going compliance with the terms and conditions of that credit policy, including immediate reporting to the Governing Body or the Governing Body's delegate where there is a deviation from or a breach of the terms and conditions or procedures applicable to the provision of such credit for timely and appropriate action.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.4.5 Guidance

              1. The requirements in these Rules do not prevent arrangements such as Employee loan schemes that allow more favourable and flexible loan terms to Employees of the Authorised Firm than those available under its normal commercial arrangements. However, such a loan scheme must comply with the requirements set out in these Rules, which are designed to address conflicts of interest that may arise in the grant, approval or management of such loans. Such conflicts are especially likely to arise where one or more of the Employees concerned are Directors, Partners or senior managers.
              2. Generally, where an Authorised Firm has an Employee loan scheme under these Rules, the DFSA expects its Governing Body to have ensured, before it or its delegate approved that scheme, that the terms, conditions and particularly limits (both at individual and aggregate level) on which credit is to be provided to Employees under the scheme are adequate and effective in addressing the risks arising from such lending. The Authorised Firm should also be able to demonstrate to the DFSA that the procedures it has adopted relating to an Employee loan scheme are adequate to address any risks arising from such lending. The DFSA expects to have access to records relating to lending under an Employee loan scheme upon request or during its supervisory visits. Any significant breach of or deviation from the procedures adopted in relation to an Employee loan scheme may also trigger the reporting requirements to the DFSA under GEN Rule 11.10.7.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.6

            For the purposes of the Rules in this chapter, a Person is a "Related Person" of an Authorised Firm if the Person:

            (a) is, or was in the past 2 years:
            (i) a member of a Group or Partnership in which the Authorised Firm is or was also a member; or
            (ii) a Controller of the Authorised Firm or a Close Relative of such a Controller;
            (b) is, or was in the past 2 years, a Director, Partner or senior manager of the Authorised Firm or an entity referred to under (a)(i) or (ii), or a Close Relative of such a Director, Partner or senior manager; or
            (c) is an entity in which a Director, Partner or senior manager of the Authorised Firm or an entity referred to in (a)(i) or (a)(ii), or a Close Relative of such a Director, Partner or senior manager has a significant interest by:
            (i) holding 20% or more of the shares of that entity, or a Parent of that entity, if that entity is a company; or
            (ii) being entitled to exercise 20% or more of the voting rights in respect of that entity;
            except that a Partner is not a Related Person where that Person is a limited partner of a Limited Partnership formed under the Limited Partnership Law of 2006 or any similar limited partnership constituted under the law of a country or territory outside the DIFC.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Procedures Manual

          • PIB 4.4.7

            An Authorised Firm must implement and maintain a documented credit procedures manual, which sets out the criteria and procedures for granting new credits, for approving extensions of existing credits and exceptions, for conducting periodic and independent reviews of credits granted and for maintaining the records for credits granted.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.8 PIB 4.4.8

            The credit procedures manual must establish:

            (a) sound, well-defined criteria for granting credit, including a thorough understanding of the borrower or Counterparty, the purpose and structure of the credit and its source of repayment;
            (b) well defined processes for approving new Exposures as well as renewing and refinancing existing Exposures;
            (c) effective credit administration processes, including continued analysis of a borrower's ability and willingness to repay under the terms of the debt, monitoring of documentation, legal covenants, contractual requirements and Collateral;
            (d) effective processes for classification and grading of credit assets consistent with the nature, size and complexity of the Authorised Firm's activities;
            (e) comprehensive processes for reporting Exposures on an ongoing basis; and
            (f) comprehensive processes for identifying problem assets, managing problem assets, monitoring their collections and for estimating required level of provisions.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.4.8 Guidance

              The same criteria should be applied to both advised and unadvised facilities and should deal with all Credit Risks associated with the Authorised Firm's business whether in the Non-Trading or Trading Book or on or off balance sheet.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.5 PIB 4.5 Processes for Credit Assessment

        • PIB 4.5.1 PIB 4.5.1

          (1) When utilising external credit rating agencies as part of its credit assessment processes, an Authorised Firm must:
          (a) maintain an internal credit grading system; and
          (b) stress test its capital position on at least an annual basis to consider the capital implications to the Authorised Firm of a significant reduction in the credit quality and associated reduction on credit ratings from credit rating agencies for its credit portfolio.
          (2) An Authorised Firm must not solely use external credit rating agency credit ratings as a basis for its assessment of the risks associated with an Exposure, in particular in respect of a Large Exposure, and must at all times conduct its own credit assessment of such an Exposure.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.5.1 Guidance

            An Authorised Firm should closely monitor the adequacy of the internal credit assessment processes, in order to assess whether there is an upward bias in internal ratings.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.2

          An Authorised Firm must implement and maintain appropriate policies, processes, systems and controls to:

          (a) administer its credit portfolios, including keeping the credit files current, getting up-to-date financial information on borrowers and other Counterparties, funds transfer, and electronic storage of important documents;
          (b) ensure that the valuations of Credit Risk mitigants employed by the Authorised Firm are up-to-date, including periodic assessment of Credit Risk mitigants such as guarantees and Collateral;
          (c) review all material concentrations in its credit portfolio and report the findings of such reviews to the Governing Body; and
          (d) measure Credit Risk (including to measure Credit Risk of off-balance sheet products such as Derivatives in credit equivalent terms) and monitor the condition of individual credits to facilitate identification of problem credits and to determine the adequacy of provisions and reserves.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.3 PIB 4.5.3

          The Credit Risk management system and, in particular, the systems, policies and processes aimed at classification of credits, monitoring and identification of problem credits, management of problem credits and provisioning for them must include all the on-balance sheet and off-balance sheet credit Exposures of the Authorised Firm.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.5.3 Guidance

            An Authorised Firm should ensure that its loan portfolio is properly classified and has an effective early-warning system for problem loans.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.4 PIB 4.5.4

          (1) An Authorised Firm must establish clearly defined criteria for identifying its problem credits and/or impaired assets which ensure that credits are classified as impaired in all cases where there is some reason to believe that all amounts due (including principal and interest) will, or may, not be collected in accordance with the contractual terms of the loan agreement.
          (2) For the purpose of (1), and subject to (3), an Authorised Firm must categorise its credits into five categories as detailed in the following table, where credits in the substandard, doubtful and loss categories must be considered as problem credits:
          Standard includes credits with no element of uncertainty about timely repayment of the outstanding amounts, including principal and interest. Credits are currently in regular payment status with prompt payments.
          Special mention includes credits with deteriorating or potentially deteriorating credit quality which, may adversely affect the borrower's ability to make scheduled payments on time. The credits in this category warrant close attention by the Authorised Firm.
          Substandard includes credits which exhibit definitive deterioration in credit quality and impaired debt servicing capacity of the borrower.
          Doubtful includes credits which show strong credit quality deterioration, worse than those in substandard category, to the extent that the prospect of full recovery of all the outstanding amounts from the credit is questionable and consequently the probability of a credit loss is high, though the exact amount of loss cannot be determined yet.
          Loss includes credits which are assessed as uncollectable and credits with very low potential for recoverability of amounts due.
          (3) An Authorised Firm may also have in place a more detailed credit grading system provided it can address the categories detailed in (2).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.5.4 Guidance

            1. With respect to the ratings above, Authorised Firms should consider Exposures as classified special mention, substandard, doubtful and loss where the loans are contractually in arrears for a minimum number of days of 30, 60, 90-120 and 120-180 days respectively. Authorised Firms should also consider the treatments as set out in PIB Rule 4.5.7 (Evergreening).
            2. Credits exhibiting the following categories should be included in the special mention category.
            (a) a declining trend in the operations of the borrower or in the borrower's ability to continue to generate cash required for repayment of the credit;
            (b) any signals which indicate a potential weakness in the financial position of the borrower, but not to the point at which repayment capacity is definitely impaired; or
            (c) business, economic or market conditions that may unfavourably affect the profitability and business of the borrower in the near to medium term.
            3. Credits exhibiting the following categories should be included in the substandard category.
            (a) inability of the borrower to meet contractual repayment terms of the credit facility;
            (b) unfavourable economic and market conditions or operating problems that would affect the profitability and cash flow generation of the borrower;
            (c) weak financial condition or the inability of the borrower to generate sufficient cash flow to service the payments.;
            (d) difficulties experienced by the borrower in servicing its other debt obligations; or
            (e) breach of any financial covenants by the borrower.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.5

          An Authorised Firm must have detailed policies, processes and resources for managing problem credits which address the following:

          (a) monitoring of credits and early identification of credit quality deterioration;
          (b) review of classification of problem credits; and
          (c) ongoing oversight of problem credits, and for collecting on past due obligations.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.6

          An Authorised Firm must ensure that each and every credit which qualifies as a Large Exposure and is classified as an impaired credit is managed individually. This includes valuation, classification and provisioning for such credits on an individual item basis.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.7

          Any evergreening exercise involving refinancing of past due credits must not result in their being classified as a higher category. In particular, impaired credits cannot be refinanced with the aim of classifying them as standard or special mention credits.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.8

          An Authorised Firm's provisioning policy must specify the following minimum provisioning requirements:

          (a) for substandard assets — 20% of the unsecured portion of the credit;
          (b) for doubtful assets — 50% of the unsecured portion of the credit; and
          (c) for loss assets — 100% of the unsecured portion of the credit.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.9

          An Authorised Firm must, on a periodic basis, at a minimum monthly frequency, review its problem credits (at an individual level or at a portfolio level for credits with homogeneous characteristics) and review the asset classification, provisioning and write-offs for each of those problem credits.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 4 Part 3 PIB 4 Part 3 — CRDOM

      • PIB 4.6 PIB 4.6 Application

        • PIB 4.6 Guidance

          1. As indicated in PIB Rule 4.1.1, this PIB chapter 4 (including this part 3) applies to Authorised Firms in Categories 1, 2, 3A and 5. However, the provisions in this part are applied in a differentiated manner in that Category 3A firms must, and Category 2 firms may, use the Simplified Approach under PIB section 4.7.
          2. The Credit Risk Capital Requirement (also referred to in this module as CRCOM) is a component of the calculation of the overall Capital Requirement of an Authorised Firm, as provided in Rules PIB 3.8.2 and PIB 3.8.3. The Rules in this PIB 4 part 3, supplemented by PIB App4, govern the manner of calculation of the CRCOM.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.7 PIB 4.7 Simplified Approach

        • Category 3A Firms

          • PIB 4.7.1 PIB 4.7.1

            (1) This Rule applies only to an Authorised Firm in Category 3A.
            (2) Subject to (3) and (4), an Authorised Firm must apply the Simplified Approach as prescribed in PIB section A4.12 in PIB App4.
            (3) An Authorised Firm is not required to apply the Simplified Approach if it obtains prior approval of the DFSA not to do so.
            (4) After obtaining approval under (3), a firm must not revert to the Simplified Approach without further prior approval from the DFSA.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.7.1 Guidance

              1. In effect, the Simplified Approach reduces undue regulatory burden on Category 3A firms to reflect more appropriately their risk profile.
              2. In relation to (3) and (4), the DFSA may consider granting its approval for a change of approach if it is satisfied that there are no regulatory capital arbitrage opportunities. Firms should be able to demonstrate to the DFSA solid and reasonable grounds to be able to move from one approach to the other. For instance, in assessing whether or not to grant approval, the DFSA may consider whether or not there has been a material change in the business of the firm.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Category 2 Firms

          • PIB 4.7.2 PIB 4.7.2

            (1) This Rule applies only to an Authorised Firm in Category 2.
            (2) Subject to (3) and (4), an Authorised Firm may apply the Simplified Approach, as prescribed in PIB section A4.12 in PIB App4, upon obtaining prior approval to do so from the DFSA.
            (3) After obtaining approval under (2), a firm must not disapply the Simplified Approach without further prior approval from the DFSA.
            (4) The DFSA may revoke its approval under (2) and require a firm to disapply the Simplified Approach, where the DFSA considers that this is warranted by the firm's business model and risk profile.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.7.2 Guidance

              In relation to (3) and (4), the DFSA may consider granting its approval for a change of approach if it is satisfied that there are no regulatory capital arbitrage opportunities. Firms should be able to demonstrate to the DFSA solid and reasonable grounds to be able to move from one approach to the other. For instance, in assessing whether or not to grant approval, the DFSA may consider whether or not there has been a material change in the business of the firm.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.8 PIB 4.8 Calculation of the Crcom

        • PIB 4.8.1

          (1) The Credit Risk Capital Requirement is calculated as follows:
          CRCOM = 8% x Credit RWA
          (2) The Credit RWA of an Authorised Firm is the sum of:
          (a) its risk weighted assets (RWA) for all its Credit Risk Exposures (referred to in this module as "CR Exposures") calculated in accordance with Rules PIB 4.8.2 and PIB 4.8.3;
          (b) its RWA for all its securitisation Exposures (referred to in this module as "SE Exposures") calculated in accordance with PIB Rule 4.8.4 and PIB section 4.14; and
          (c) its RWA for its Counterparty Risk Exposures as calculated in accordance with sections PIB A4.6 to PIB A4.8.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

        • Calculation of RWA for Credit Risk Exposures (CR Exposures)

          • PIB 4.8.2

            An Authorised Firm must include in its calculation of RWA for CR Exposures:

            (a) any on-balance sheet asset; and
            (b) any off-balance sheet item;

            but excluding:

            (c) any SE Exposure;
            (d) any securitised Exposure that meets the requirements for the recognition of risk transference in a Traditional Securitisation set out in PIB section 4.14; or
            (e) any Exposure classified as a position or instrument in the Trading Book in accordance with PIB section A2.1.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.8.3

            To calculate its RWA for CR Exposures, an Authorised Firm must:

            (a) calculate the value of the Exposure (represented as "E") for every on-balance sheet and every off-balance sheet asset in accordance with the Exposure measurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit Risk mitigation;
            (b) categorise that Exposure in accordance with the Rules in PIB section 4.10;
            (c) allocate an applicable Credit Quality Grade and risk weight for that Exposure in accordance with the Rules in section PIB 4.11 and PIB 4.12;
            (d) calculate the RWA amount for that Exposure using the following formula:
            RWA(CR) = E x CRW
            where:
            (i) "RWA(CR)" refers to the risk-weighted Exposure amount for that CR Exposure;
            (ii) "E" refers to the Exposure value or amount, for that CR Exposure; and
            (iii) "CRW" refers to the applicable risk weight for that CR Exposure determined in accordance with (b) and (c); and
            (e) add the RWA amounts calculated in accordance with (d) for all its CR Exposures.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of RWA for Securitisation Exposures (SE Exposures)

          • PIB 4.8.4

            To calculate its RWA for all its SE Exposures, an Authorised Firm must:

            (a) calculate the value of the Exposure for each of its SE Exposures in accordance with Exposure measurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit Risk mitigation;
            (b) allocate an applicable Credit Quality Grade for that SE Exposure in accordance with the Rules in PIB section 4.11;
            (c) calculate the RWA amount for each SE Exposure, except for those SE Exposures which the Authorised Firm is required to include as deductions from any component of Capital Resources, using the following formula:
            RWA(SE) = SE x CRW
            where:
            (i) "RWA(SE)" refers to the risk-weighted Exposure amount for that securitisation Exposure;
            (ii) "SE" refers to the Exposure value or amount for that SE Exposure calculated in accordance with (a); and
            (iii) "CRW" refers to the applicable risk weight for that SE Exposure determined in accordance with (b); and
            (d) add the RWA amounts calculated in accordance with (c) for all its SE Exposures to the RWA amounts calculated in accordance with PIB Rule 4.8.5 in respect of its Early Amortisation Exposures.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.8.5

            To calculate its RWA for Early Amortisation Exposures, an Authorised Firm must:

            (a) calculate the value of the Exposure (EAE) for each of its Early Amortisation Exposures in accordance with Exposure measurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit Risk mitigation;
            (b) calculate the risk-weighted Exposure amount for each Early Amortisation Exposure using the following formula:
            RWA(EAE) = EAE x CRW
            where:
            (i) "RWA(EAE)" refers to the risk-weighted Exposure amount for that Early Amortisation Exposure;
            (ii) "EAE" refers to the Exposure value or amount, for that Early Amortisation Exposure calculated in accordance with (a); and
            (iii) "CRW" refers to the applicable risk weight for the underlying Exposure type as if the Exposure had not been securitised; and
            (c) add the RWA amounts calculated in accordance with (b) for all its Early Amortisation Exposures.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.8.6

            The aggregate RWA amount for all of the SE Exposures of an Authorised Firm to a securitisation and Exposures arising from Credit Risk mitigation applied to those SE Exposures must not exceed the aggregate RWA amount corresponding to the underlying Exposures of the securitisation had they been on the balance sheet of the Authorised Firm and included in the calculation of the Credit RWA of the Authorised Firm. For avoidance of doubt, the aggregate RWA amount must not include any deduction for a gain-on-sale or a Credit-Enhancing Interest-Only Strip arising from the securitisation.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.9 PIB 4.9 Methodology for Measurement of Exposures

        • PIB 4.9.1 PIB 4.9.1

          An Authorised Firm must apply the Exposure measurement methodology set out in the Rules in this part to calculate the value or amount of an Exposure for any CR Exposure or SE Exposure.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.1 Guidance

            1. The measurement methodology in this section prescribes the manner of calculation of Exposures for the purpose of determining the Credit RWA for Credit Risk (CR) Exposures as provided in PIB Rule 4.8.3 and for securitisation (SE) Exposures as provided in PIB Rule 4.8.4.
            2. Due regard should be given to the Guidance relating to prudent valuation in PIB section 2.4 and related provisions in PIB A2.5.
            3. An Authorised Firm should consult with the DFSA on the appropriate treatment to apply in the measurement of E, for transactions that have not been addressed in this part.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.9.2

          An Authorised Firm must calculate E for any CR Exposure or SE Exposure, net of any individual impairment provision attributable to such Exposures, as determined in accordance with the International Financial Reporting Standards.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for On-Balance Sheet Assets

          • PIB 4.9.3 PIB 4.9.3

            For each on-balance sheet asset, E should be the carrying value of the asset as determined in accordance with the International Financial Reporting Standards.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.9.3 Guidance

              1. For any asset, E should be equal to the fair value of that asset presented in the balance sheet except that:
              a. for any asset held at cost, E, should be equal to the cost of the asset presented in the balance sheet; and
              b. for any available-for-sale (AFS) debt security or AFS loan, E, should be equal to the fair value less provision for impairment of that AFS debt security or AFS loan, adjusted by deducting any unrealised fair value gains and adding back any unrealised fair value losses on revaluation (broadly equivalent to the amortised cost of the AFS debt security or AFS loan less any provision for impairment).
              2. In the case of a lease where the Authorised Firm is exposed to residual value risk (i.e. potential loss due to the fair value of the leased asset declining below the estimate of its residual value reflected on the balance sheet of the Authorised Firm at lease inception), the Authorised Firm should calculate (i) an Exposure to the lessee equivalent to the discounted lease payment stream; and (ii) an Exposure to the residual value of the leased assets equivalent to the estimate of the residual value reflected in the balance sheet of the Authorised Firm.
              3. Any foreign exchange transaction or translation gain or loss from a foreign currency-denominated on-balance sheet item as well as interest earned on a fixed income instrument should be allocated to the Exposure to which it accrues.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Off-Balance Sheet Items Other than Counterparty Risk Exposures

          • PIB 4.9.4 PIB 4.9.4

            (1) For each off-balance sheet item other than a pre-settlement Counterparty Exposure arising from an OTC Derivative transaction, long settlement transaction or securities financing transaction (referred to in PIB as an "SFT"), an Authorised Firm must calculate E by:
            (a) in the case of an Early Amortisation Exposure, multiplying the amount of investors' interest by the applicable CCF set out in Rules PIB A4.2.1 and PIB A4.2.2 in PIB App4; and
            (b) in all other cases, multiplying the notional amount of each item by:
            (i) the applicable CCF set out in PIB Rule A4.2.1 in PIB App4 if that item is a CR Exposure; or
            (ii) the applicable CCF set out in PIB Rule A4.2.2 in PIB App4 if that item is an SE Exposure.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.9.4 Guidance

              1. An Authorised Firm which is exposed to the risk of the underlying Securities in an OTC Derivative transaction, long settlement transaction or SFT which is in substance similar to a forward purchase or credit substitute should calculate E, for such an Exposure, in accordance with PIB Rule 4.9.4(1).
              2. Investors' interest is defined as the sum of:
              a. investors' drawn balances related to the securitised Exposures; and
              b. E associated with investors' undrawn balances related to the SE Exposures. E is determined by allocating the undrawn balances of securitised Exposures on a pro-rata basis based on the proportions of the Originator's and investor shares of the securitised drawn balances.
              3. For avoidance of doubt, where an Authorised Firm has provided unfunded credit protection via a total rate of return swap, E should be equal to the notional amount of the underlying reference credit for which the Authorised Firm is providing protection adjusted for any payments received from or made to the protection buyer and recognised in the profit and loss account of the Authorised Firm. Where an Authorised Firm has provided unfunded credit protection via a credit default swap, E should be equal to the notional amount of the underlying reference credit for which the Authorised Firm is providing protection.
              4. The notional amount of an off-balance sheet item refers to the amount which has been committed but is as yet undrawn. The amount to which the CCF is applied is the lower of the value of the unused committed credit line, and the value which reflects any possible constraining availability of the facility, such as the existence of a ceiling on the potential lending amount which is related to an obligor's reported cash flow. If the facility is constrained in this way, the Authorised Firm must have sufficient line monitoring and management procedures to support this contention.
              5. Any foreign exchange transaction or translation gain or loss from a foreign currency-denominated off-balance sheet item should be allocated to the Exposure to which it accrues.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Eligible Financial Collateral for On-Balance Sheet Assets and Off-Balance Sheet Items Other Than Counterparty Exposures

          • PIB 4.9.5

            (1) An Authorised Firm which has taken eligible financial Collateral for any transaction other than an equity Exposure, an SE Exposure, an OTC Derivative transaction, long settlement transaction or SFT may recognise the effect of such Collateral in accordance with Rules PIB 4.9.6 and PIB 4.9.7.
            (2) An Authorised Firm must use either the:
            (a) Financial Collateral Simplified Approach (FCSA) which adopts the treatment under PIB Rule 4.13.5 in relation to the composition of financial Collateral; or
            (b) Financial Collateral Comprehensive Approach (FCCA) which adopts the treatment under PIB Rule 4.13.6;
            to recognise the effect of eligible financial Collateral.
            (3) An Authorised Firm must apply the chosen approach consistently to its entire Non-Trading Book and must not use a combination of both approaches.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.6

            An Authorised Firm using the FCSA may recognise the effect of eligible financial Collateral in accordance with the Rules in PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.7

            An Authorised Firm using the FCCA may calculate the CR Exposure adjusted for eligible financial Collateral (referred to in PIB as "E*"), in accordance with Rules in PIB section A4.3 of PIB App4 and substitute E* for E when calculating the Credit Risk-weighted Exposure amount for that CR Exposure under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Eligible Financial Collateral for Securitisation (SE) Exposures

          • PIB 4.9.8

            An Authorised Firm that has taken eligible financial Collateral for an SE Exposure may recognise the effect of such Collateral in accordance with Rules PIB 4.9.9 to PIB 4.9.11.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.9

            An Authorised Firm calculating RWAs for SE Exposures must use either the FCSA or the FCCA approaches to recognise the effect of eligible financial Collateral. An Authorised Firm must apply the chosen approach consistently to the entire Non-Trading Book and must not use a combination of both approaches.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.10

            An Authorised Firm using the FCSA approach for an SE Exposure may recognise the effect of eligible financial Collateral in accordance with PIB section 4.13 and PIB Rule 4.14.70.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.11

            An Authorised Firm using the FCCA approach for an SE Exposure must calculate E*, the SE Exposure adjusted for eligible financial Collateral, in accordance with Rules in PIB section A4.3 of PIB App4 and substitute E* for E when calculating the RWA for SE Exposure under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Counterparty Exposures

          • PIB 4.9.11 Guidance

            Rules PIB 4.19.12 to PIB 4.19.21 should be read in conjunction with sections PIB A4.6 to PIB A4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Counterparty Exposures Arising from OTC Derivative Transactions and Long Settlement Transactions

          • PIB 4.9.12

            For each OTC Derivative transaction or long settlement transaction which is not covered by a qualifying cross-product Netting agreement, an Authorised Firm should calculate E for the pre-settlement Counterparty Exposure arising from that OTC Derivative transaction or long settlement transaction using the method set out in sections PIB A4.6 to PIB A4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Pre-Settlement Counterparty Exposures Arising from SFTs

          • PIB 4.9.13

            An SFT must be treated as Collateralised lending, notwithstanding the wide range of structures which could be used for SFTs.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.14

            An Authorised Firm must calculate E, for a pre-settlement Counterparty Exposure arising from an SFT, other than an Exposure covered by a qualifying cross-product Netting agreement, in accordance with Rules PIB 4.9.15 to PIB 4.9.20.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.15

            An Authorised Firm must determine E, for a pre-settlement Counterparty Exposure arising from an SFT which is not covered by a qualifying cross-product Netting agreement as follows:

            (a) in the case where the Authorised Firm has lent Securities to a Counterparty or sold Securities to a Counterparty with a commitment to repurchase those Securities at a specified price on a specified future date, the latest fair value of the Securities lent or sold; and
            (b) in the case where the Authorised Firm has lent cash to a Counterparty through the borrowing of Securities from the Counterparty or paid cash for the purchase of Securities from a Counterparty with a commitment to resell those Securities at a specified price on a specified future date, the amount of cash lent or paid.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.16

            An Authorised Firm which has taken eligible financial Collateral for any SFT where the pre-settlement Counterparty Exposure is determined in accordance with PIB Rule 4.9.15 may recognise the effect of such Collateral in accordance with Rules PIB 4.9.17 to PIB 4.9.20.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.17

            An Authorised Firm must use either the FCSA or the FCCA to recognise the effect of eligible financial Collateral for any SFT in the Non-Trading Book. The Authorised Firm must apply the chosen approach consistently to the entire Non-Trading Book and must not use a combination of both approaches. For a pre-settlement Counterparty Exposure arising from any SFT in the Trading Book, an Authorised Firm must only use the FCCA to recognise the effect of eligible financial Collateral.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.18

            An Authorised Firm using the FCSA may recognise the effect of eligible financial Collateral for any SFT in accordance with Rules PIB A4.3.27 to PIB A4.3.29 in PIB App4.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.19

            An Authorised Firm which has taken eligible financial Collateral for any SFT that is not covered by a qualifying bilateral Netting agreement and using the FCCA, must calculate E* in accordance with Rules PIB A4.3.2 to PIB A4.3.6 in PIB App4, and substitute E* for E when calculating the Credit Risk-weighted Exposure amount for that CR Exposure under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.20

            An Authorised Firm which has taken eligible financial Collateral for an SFT that is covered by a qualifying bilateral Netting agreement and using the FCCA, must calculate E* for all its CR Exposures to any single Counterparty covered by the qualifying bilateral Netting agreement, in accordance with Rules PIB A4.3.2 to PIB A4.3.6 in PIB App4 (if the Authorised Firm is using supervisory haircuts or own-estimate haircuts), and substitute E* for E when calculating the Credit Risk-weighted Exposure amount for its CR Exposures to that Counterparty under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exceptions to the Measurement of E

          • PIB 4.9.21 PIB 4.9.21

            An Authorised Firm may attribute a value of zero to E for:

            (a) any pre-settlement Counterparty Exposure arising from any Derivative transaction or SFT outstanding with a CCPe and which has not been rejected by that CCP, provided that the Exposure is fully Collateralised on a daily basis;
            (b) any Credit Risk Exposure arising from any Derivative transaction, SFT or spot transaction which an Authorised Firm has outstanding with a CCP for which the latter acts as a custodian on the Authorised Firm's behalf, provided that the Exposure is fully Collateralised on a daily basis;
            (c) any pre-settlement Counterparty Exposure arising from any Credit Derivative which an Authorised Firm may recognise as eligible credit protection for a Non-Trading Book Exposure or another CCR Exposure; and
            (d) any pre-settlement Counterparty Exposure arising from any sold credit default swap in the Non-Trading Book, where the credit default swap is treated as credit protection sold by the Authorised Firm.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.9.21 Guidance

              Credit Risk (CR) Exposures outstanding with a CCP would, for example, include credit Exposures arising from monies placed and from Collateral posted, with the Counterparty.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.10 PIB 4.10 Categorisation of Credit Risk Exposures (CR Exposures)

        • PIB 4.10 Guidance

          This section categorises Exposures for the purpose of determining the CRW for CR Exposures, as provided in PIB Rule 4.8.3.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.10.1 PIB 4.10.1

          An Authorised Firm must categorise any CR Exposure that is not past due for more than 90 days into one of the following asset classes:

          (a) cash items, which consist of:
          (i) cash and cash equivalents;
          (ii) gold bullion held in the vaults of the Authorised Firm or on an allocated basis in the vaults of another entity to the extent that it is backed by gold bullion liabilities; and
          (iii) all receivable funds arising from transactions that are settled on a DvP basis which are outstanding up to and including the 4th business day after the settlement date;
          (b) central government and Central Bank asset class, which consists of any CR Exposure to a central government or Central Bank;
          (c) the PSE asset class, which consists of any CR Exposure to a PSE;
          (d) the MDB asset class, which consists of any CR Exposure to an MDB;
          (e) bank asset class, which consists of any CR Exposure to a banking institution;
          (f) corporate asset class, which consists of any CR Exposure to any corporation, partnership, sole proprietorship or trustee in respect of a trust, other than Exposures categorised in sub-paragraphs (a) to (e), (g) and (h);
          (g) regulatory retail asset class, which consists of any CR Exposure meeting all of the following conditions:
          (i) the Exposure is to an individual, a group of individuals, or a small business;
          (ii) the Exposure takes the form of any of the following:
          (A) revolving credit and lines of credit, including credit cards and overdrafts;
          (B) personal term loans and leases, including instalment loans, vehicle loans and leases, student and educational loans;
          (C) small business credit facilities and commitments; or
          (D) any other product which the DFSA may specify from time to time;
          (iii) the Exposure is one of a sufficient number of Exposures with similar characteristics such that the risks associated with such lending are reduced; and
          (iv) the total Exposure to any obligor or group of obligors is not more than $2 million;
          (h) residential mortgage asset class, which consists of any CR Exposure meeting all of the following conditions:
          (i) the Exposure is to an individual or a group of individuals, or if the Exposure is to an entity other than an individual, the Authorised Firm can demonstrate to the DFSA (if required to do so) that it has robust processes to ascertain that the Exposure is structured to replicate the risk profile of an Exposure to an individual or a group of individuals and that it is able to identify and manage the legal risks that arise in such structures;
          (ii) the Exposure is secured against a first lien mortgage:
          (A) of a completed residential property; or
          (B) on an exceptional basis of an uncompleted residential property in a jurisdiction approved by the DFSA;
          (iii) the Exposure is not classified as an impaired asset in accordance with Rules in this module; and
          (iv) the Exposure is not to a corporation, partnership, sole proprietorship or trustee in respect of a trust where such corporation, partnership, sole proprietorship or trust is engaged in residential building, development or management;
          (i) the commercial real estate asset class, which consists of any CR Exposure meeting all of the following conditions:
          (i) the Exposure is to a corporation, partnership, sole proprietorship or trustee in respect of a trust; and
          (ii) the Exposure is secured by commercial real estate; or
          (j) other Exposures asset class, which consists of any CR Exposure which does not fall within any of the categories in sub-paragraphs (a) to (i).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.10.1 Guidance

            The Exposures listed under item (f) include transactions settled on a payment-versus-payment basis. For avoidance of doubt, the DFSA expects that a CR Exposure to a securities firm should be categorised within the corporate asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.11 PIB 4.11 Credit Quality Grade and External Credit Assessments

        • PIB 4.11 Guidance

          This section governs credit assessments of Exposures for the purpose of determining the CRW for Credit Risk (CR) Exposures as provided in PIB Rule 4.8.3 and for securitisation (SE) Exposures as provided in PIB Rule 4.8.4.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.1

          An Authorised Firm must assign a CR Exposure to a Credit Quality Grade based on the external credit assessment that is applicable to the CR Exposure in accordance with tables mapping the ratings from an ECAI to Credit Quality Grades, which will be published by the DFSA.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.2

          An Authorised Firm must only use an external credit assessment which is accessible to the public. An Authorised Firm may not use a credit assessment that is made available only to the parties to a transaction.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.3

          An Authorised Firm must only use external credit assessments by a recognised ECAI. The DFSA may impose conditions on the use of such external credit assessments.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.4 PIB 4.11.4

          An Authorised Firm must use its chosen recognised external credit rating agencies and their external credit assessments consistently for each type of Exposure, for both risk weighting and risk management purposes. Where an Authorised Firm has two external credit assessments which map into different Credit Quality Grades, it must assign the CR Exposure to the Credit Quality Grade associated with the higher risk weight. Where an Authorised Firm has three or more external credit assessments which map into two or more different Credit Quality Grades, it must assign the CR Exposure to the Credit Quality Grade associated with the higher of the two lowest risk weights.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.11.4 Guidance

            For illustration, if there are three external credit assessments mapping into Credit Quality Grades with risk weights of 0%, 20% and 50%, then the applicable risk weight is 20%. If the external credit assessments map into Credit Quality Grades with risk weights of 20%, 50% and 50%, then the applicable risk weight is 50%.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.5

          An Authorised Firm must not recognise the effects of Credit Risk mitigation if such mitigation is al reflected in the issue-specific external credit assessment of the CR Exposure.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.6

          Where a CR Exposure has an issue-specific external credit assessment from a recognised ECAI, an Authorised Firm must use such assessment. Where a CR Exposure does not have an issue-specific external credit assessment, an Authorised Firm must:

          (a) if there is an issue-specific external credit assessment for another Exposure to the same obligor, use the issue-specific assessment for the other Exposure only if the Exposure without an issue-specific assessment ranks pari passu with or is senior to the Exposure with the issue-specific assessment;
          (b) if the obligor has an Issuer external credit assessment, use the Issuer assessment of the obligor only if the Exposure without an issue-specific assessment ranks pari passu with or is senior to any unsecured claim that is not subordinated to any other claim on the obligor; or
          (c) in all other cases, apply a risk weight equal to the higher of the risk weight that is applicable to an unrated Exposure and the risk weight associated with the external credit assessment, if any, of the obligor or another Exposure to the same obligor.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.7

          Where a CR Exposure is risk-weighted in accordance with PIB Rule 4.11.6(a) or (b), an Authorised Firm may use a domestic currency external credit assessment only if the CR Exposure is denominated in that domestic currency.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.8

          An Authorised Firm may use an external credit assessment to risk weight a CR Exposure only if the external credit assessment has taken into account and reflects the entire amount of Credit Risk Exposure the Authorised Firm has with regard to all payments owed to it.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.9

          An Authorised Firm must not use unsolicited external credit assessments to assign any CR Exposure to a Credit Quality Grade, unless:

          (a) it has assessed the quality of the unsolicited external credit assessments that it intends to use and is satisfied that these are comparable in performance with solicited external credit assessments and maintains relevant records and documents to be made available to the DFSA upon request; and
          (b) it uses unsolicited external credit assessments consistently for each type of Exposures, for both risk weighting and risk management purposes.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.12 PIB 4.12 Risk Weights

        • PIB 4.12.1 PIB 4.12.1

          An Authorised Firm with a CR Exposure must:

          (a) for a CR Exposure that is not past due for more than 90 days, determine the applicable risk weight in accordance with Rules PIB 4.12.2 to PIB 4.12.23;
          (b) for a CR Exposure that is past due for more than 90 days, determine the applicable risk weight in accordance with Rules PIB 4.12.24 to PIB 4.12.26; and
          (c) for a CR Exposure arising from an Unsettled Transaction, determine the applicable risk weight in accordance with Rules PIB A4.6.5 to PIB A4.6.8.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.1 Guidance

            Where a CR Exposure which is not past due has a Credit Quality Grade which corresponds to a risk weight of 150%, an Authorised Firm may apply the appropriate treatment and risk weights set out in Rules PIB 4.12.24 to PIB 4.12.26.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Cash Items

          • PIB 4.12.2

            Subject to PIB Rule 4.12.3, an Authorised Firm may apply a 0% risk weight to any CR Exposure categorised as a cash item.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.3

            An Authorised Firm must apply a 20% risk weight to cheques, drafts and other items drawn on other banking institutions that are either payable immediately upon presentation or that are in the process of collection.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Central Government and Central Bank Asset Class

          • PIB 4.12.4

            Subject to PIB Rule 4.12.5, an Authorised Firm must risk-weight any CR Exposure in the central government and Central Bank asset class in accordance with the table below.

            Risk weights for the central government and Central Bank asset class

            Credit Quality Grade 1 2 3 4 5 6 Unrated
            Risk Weight 0% 20% 50% 100% 100% 150% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.5

            An Authorised Firm may apply a 0% risk weight to any CR Exposure to central governments or central banks of a GCC member country which are denominated and funded in the domestic currency of the GCC member country. For the purposes of this Rule, individual Emirates of the UAE will be considered as though they were GCC member countries.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Public Sector Enterprises (PSE) Asset Class

          • PIB 4.12.6 PIB 4.12.6

            (1) Subject to PIB Rule 4.12.8, an Authorised Firm must risk-weight any CR Exposure in the PSE asset class in accordance with the following table:

            Risk Weights for the PSE asset class
            Credit Quality Grade 1 2 3 4 5 6 Unrated
            Risk Weight 20% 50% 100% 100% 100% 150% 100%
            (2) In (1), sovereign PSEs in the UAE and GCC that exhibit Credit Risks comparable to their central government must be treated in accordance with the requirements set out in PIB Rule 4.12.5.
            (3) For the purposes of this Rule, a sovereign PSE is a PSE which has been designated as such by its national authorities.
            (4) Any foreign currency claims on sovereign PSEs which are determined to meet the conditions of (2) must be treated as one grade less favourable than the risk weight allocated in accordance with Rules PIB 4.12.4 and PIB 4.12.5.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.12.6 Guidance

              Any PSE which exhibits risk characteristics of a commercial enterprise should be treated in accordance with Rules PIB 4.12.13 to PIB 4.12.15.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Multilateral Development Bank (MDB) Asset Class

          • PIB 4.12.7

            Subject to Rules PIB 4.12.8 and PIB 4.12.9, an Authorised Firm must risk-weight any CR Exposure in the MDB asset class in accordance with the following table:

            Risk Weights for the MDB asset class

            Credit Quality Grade 1 2 3 4 5 6 Unrated
            Risk Weight 0% 50% 50% 100% 100% 150% 50%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.8

            An Authorised Firm must apply a 0% risk weight to any CR Exposure to the qualifying MDBs set out below:

            (a) The World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD), the Multilateral Investment Guarantee Agency (MIGA), and the International Finance Corporation (IFC);
            (b) The Asian Development Bank (ADB);
            (c) The African Development Bank (AfDB);
            (d) The European Bank for Reconstruction and Development (EBRD);
            (e) The Inter-American Development Bank (IADB);
            (f) The European Investment Bank (EIB);
            (g) The European Investment Fund (EIF);
            (h) The Nordic Investment Bank (NIB);
            (i) The Caribbean Development Bank (CDB);
            (j) The Islamic Development Bank (IDB); and
            (k) The Council of Europe Development Bank (CEDB).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.9

            An Authorised Firm must apply a 0% risk weight to any CR Exposure to the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, or the European Stability Mechanism.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RM215/2018 (Made 22nd February 2018). [VER31/04-18]

        • Bank Asset Class

          • PIB 4.12.10 PIB 4.12.10

            Subject to Rules PIB 4.12.11 and PIB 4.12.12, an Authorised Firm must risk-weight any CR Exposure in the bank asset class in accordance with the following table:

            CRWs for the bank asset class

            Credit Quality Grade 1 2 3 4 5 6 Unrated
            Risk Weight 20% 50% 50% 100% 100% 150% 50%
            Risk Weight for Short-Term Exposures 20% 20% 20% 50% 50% 150% 20%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.12.10 Guidance

              For the purposes of the above table, short-term Exposures refer to Exposures with an Original Maturity of three months or less and that are not expected to be rolled over.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.11

            An Authorised Firm must risk-weight any short-term CR Exposure in the bank asset class with an issue-specific external credit assessment in accordance with the following table.

            CRWs for short-term CR Exposures in the bank asset class with issue-specific external credit assessments

            Short-Term Credit Quality Grade I II III IV
            Risk Weight 20% 50% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.12

            The CRW for any CR Exposure in the bank asset class that does not have an external credit assessment by a recognised external credit rating agency must be the risk weight determined in accordance with the table in PIB Rule 4.12.10 or the risk weight that is applicable to an CR Exposure to the central government of the jurisdiction in which the banking institution is incorporated or established, whichever is higher. If a short-term CR Exposure in the bank asset class with an issue-specific external credit assessment:

            (a) attracts a risk weight of 50% or 100%, then the Authorised Firm must apply a risk weight of not lower than 100% to any unrated short-term CR Exposure to the same banking institution; or
            (b) attracts a risk weight of 150%, then the Authorised Firm must apply a risk weight of 150% to any unrated CR Exposure (whether long-term or short-term) to the same banking institution.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Corporate Asset Class

          • PIB 4.12.13

            Subject to Rules PIB 4.12.14 and PIB 4.12.15, an Authorised Firm must risk-weight any CR Exposure in the corporate asset class in accordance with the following table:

            Risk Weights for the corporate asset class

            Credit Quality Grade 1 2 3 4 5 6 Unrated
            Risk Weight 20% 50% 100% 100% 150% 150% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.14

            An Authorised Firm must risk-weight any short-term CR Exposure in the corporate asset class with an issue-specific external credit assessment in accordance with the following table:

            Risk Weights for short-term CR Exposures in the corporate asset class with issue-specific external credit assessments.

            Short-Term Credit Quality Grade I II III IV
            Risk Weight 20% 50% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.15

            The risk weight for any CR Exposure in the corporate asset class that does not have an external credit assessment by a recognised external credit rating agency must be the risk weight determined in accordance with the table under PIB Rule 4.12.13 or the risk weight that is applicable to an CR Exposure to the central government of the jurisdiction in which the corporate is incorporated or established, whichever is higher. If a short-term CR Exposure in the corporate asset class with an issue-specific external credit assessment:

            (a) attracts a risk weight of 50% or 100%, then the Authorised Firm must apply a risk weight of not lower than 100% to any unrated short-term CR Exposure to the same corporate; or
            (b) attracts a risk weight of 150%, then the Authorised Firm must apply a risk weight of 150% to any unrated CR Exposure (whether long-term or short-term) to the same corporate.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Regulatory Retail Asset Class

          • PIB 4.12.16

            An Authorised Firm must apply a 100% risk weight to any CR Exposure in the regulatory retail asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Residential Mortgage Asset Class

          • PIB 4.12.17

            An Authorised Firm must risk weight any CR Exposure in the residential mortgage asset class in accordance with the following table:

            Risk weights for the residential mortgage asset class

            Condition Risk Weight
            Loans fully secured on residential property to a maximum loan to value of 80% 50%
            Loans secured on residential property in excess of a loan to value of 80% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Commercial Real Estate Asset Class

          • PIB 4.12.18

            An Authorised Firm must apply a 100% risk weight to any CR Exposure in the commercial real estate asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.19

            An Authorised Firm must apply a risk weight of 150% to Exposures, including Exposures in the form of Shares or Units in a Collective Investment Fund, that are associated with particularly high risks.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.20

            For the purposes of PIB Rule 4.12.19, Exposures with particularly high risks must include the following investments:

            (a) investments in venture capital funds
            (b) investments in hedge funds or alternative investment funds, including but not limited to private equity funds;
            (c) speculative immovable property financing; and
            (d) any investments declared by the DFSA to constitute high risk for the purpose of this Rule.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.21

            When assessing whether an Exposure other than Exposures referred to in PIB Rule 4.12.20 is associated with particularly high risks, an Authorised Firm must take into account the following risk characteristics:

            (a) there is a high risk of loss as a result of a default of the obligor; and
            (b) it is impossible to assess adequately whether the Exposure falls under (a).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Other Exposures Asset Class

          • PIB 4.12.22

            An Authorised Firm must apply a 100% risk weight to any CR Exposure in the other Exposures asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.23

            Investments in equity or regulatory capital instruments issued by banks or securities firms must be risk weighted at 100%, unless deducted from the capital base.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Past Due Exposures

          • PIB 4.12.24

            Subject to Rules PIB 4.12.25 and PIB 4.12.26, an Authorised Firm must risk-weight the unsecured portion of any CR Exposure that is past due for more than 90 days in accordance with the following table.

            Risk weights for past due Exposures

            Condition Risk Weight
            Where specific provisions are less than 20% of the outstanding amount of the Exposure 150%
            Where specific provisions are no less than 20% of the outstanding amount of the Exposure 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.25

            For the purposes of PIB Rule 4.12.24, an Authorised Firm must calculate the unsecured portion of any CR Exposure that is past due for more than 90 days as follows:

            (a) for an Authorised Firm using the FCSA:
            Unsecured Portion = E – P – Cf
            where:
            (i) E = E calculated in accordance with PIB section 4.9;
            (ii) P = notional amount of eligible credit protection received; and
            (iii) Cf = fair value of eligible financial Collateral received; or
            (b) for an Authorised Firm using the FCCA:
            Unsecured Portion = E* – P
            where —
            (i) E* = E* calculated in accordance with PIB section 4.9; and
            (ii) P = notional amount of eligible credit protection received.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.26

            An Authorised Firm must apply a 100% risk weight to any CR Exposure in the residential mortgage asset class that is past due for more than 90 days.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.13 PIB 4.13 Credit Risk Mitigation

        • PIB 4.13 Guidance

          This section sets out the principles and methodologies for the recognition of Credit Risk mitigation in the calculation of Credit RWA.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • General Requirements

          • PIB 4.13.1 PIB 4.13.1

            (1) An Authorised Firm must not recognise the effects of Credit Risk mitigation unless:
            (a) all documentation relating to that mitigation is binding on all relevant parties and legally enforceable in all relevant jurisdictions; and
            (b) the Authorised Firm complies with the Rules set out in this section, as applicable.
            (2) Where the calculation of Credit RWA al takes into account the Credit Risk mitigant, the provisions of this section do not apply.
            (3) An Authorised Firm must, where it uses a specific Credit Risk mitigation technique for the purposes of its Capital, use the same technique for Large Exposure reduction, where it is permitted and chooses to use mitigation under the requirements in PIB chapter 4.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Added] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

            • PIB 4.13.1 Guidance

              An Authorised Firm should conduct sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability. The review should cover relevant jurisdictions such as the jurisdiction whose law governs the credit protection or Collateral agreement and the jurisdiction whose law governs the transaction subject to the credit protection or Collateral agreement. There should be sufficient written documentary evidence to adequately support the conclusion drawn and rebut any legal challenge. While an Authorised Firm may use either in-house or external legal counsel, it should consider whether or not in-house counsel opinion is appropriate. The senior management of the Authorised Firm should ensure that an officer of the Authorised Firm who is legally qualified and independent of the parties originating the transaction reviews the legal opinion and confirms that he is satisfied that an adequate review has been completed and that he agrees with the conclusions drawn. A record of these reviews should be kept and made available at the request of the DFSA.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.2

            Where an Authorised Firm uses multiple Credit Risk mitigation for a single Exposure, the Authorised Firm must divide the Exposure into portions covered by each mitigation and must calculate the Credit Risk-weighted Exposure amount of each portion separately. An Authorised Firm must apply the same approach when recognising eligible credit protection by a single protection provider where the eligible credit protection has differing maturities.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.3 PIB 4.13.3

            (1) An Authorised Firm must take all appropriate steps to ensure the effectiveness of the Credit Risk mitigation arrangements it employs and to address related risks.
            (2) Where an Authorised Firm reduces or transfers Credit Risk by the use of Credit Risk mitigation, an Authorised Firm must employ appropriate and effective policies and procedures to identify and control other risks which arise as a consequence of the transfer.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.3 Guidance

              1. The use of techniques to reduce or transfer Credit Risk may simultaneously increase other risks (residual risks) which include legal, operational, liquidity and Market Risks. The DFSA expects an Authorised Firm to employ methods to identify and control these risks, including:
              a. strategy;
              b. consideration of the underlying credit;
              c. valuation;
              d. policies and procedures;
              e. systems;
              f. control of roll-off risks; and
              g. management of Concentration Risk arising from the use of Credit Risk mitigation and the interaction of such risk with the overall Credit Risk profile of the Authorised Firm.
              2. In order to fulfil the above, an Authorised Firm should ensure a clearly articulated strategy for the use of Credit Risk mitigation as an intrinsic part of the general credit strategy of an Authorised Firm.
              3. Where an Exposure is subject to Credit Risk mitigation, credit managers should continue to assess the Exposure on the basis of the obligor's creditworthiness. Credit managers should obtain and analyse sufficient financial information to determine the obligor's risk profile and its management and operational capabilities.
              4. Collateral should be revalued frequently, and the unsecured Exposure should also be monitored frequently. Frequent revaluation is prudent, and the revaluation of marketable securities should occur on at least a daily basis. Furthermore, measures of the potential unsecured Exposure under collateralised transactions should be calculated under stressed and normal conditions. One such measure would take account of the time and cost involved if the obligor or Counterparty were to default and the Collateral had to be liquidated. Furthermore, the setting of limits for collateralised Counterparties should take account of the potential unsecured Exposure. Stress tests and scenario analysis should be conducted to enable the Authorised Firm to understand the behaviour of its portfolio of Credit Risk mitigation arrangements under unusual market conditions. Any unusual or disproportionate risk identified should be managed and controlled.
              5. Clear policies and procedures should be established in respect of Collateral management, including:
              a. the terms of Collateral agreements;
              b. the types of Collateral and enforcement of Collateral terms (e.g. waivers of posting deadlines);
              c. the management of legal risks;
              d. the administration of agreement (e.g. detailed plans for determining default and liquidating Collateral); and
              e. the prompt resolution of disputes, such as valuation of Collateral or positions, acceptability of Collateral, fulfilment of legal obligations and the interpretation of contract terms.
              6. The policies and procedures referred to under Guidance note 1(d) should be supported by Collateral management systems capable of tracking the location and status of posted Collateral (including re-hypothecated Collateral), outstanding Collateral calls and settlement problems.
              7. Where an Authorised Firm obtains credit protection that differs in maturity from the underlying credit Exposure, the Authorised Firm should monitor and control its roll-off risks, i.e. the fact that the Authorised Firm will be fully exposed when the protection expires, and the risk that it will be unable to purchase credit protection or ensure its capital adequacy when the credit protection expires.
              8. Taking as Collateral large quantities of instruments issued by one obligor creates Concentration Risk. An Authorised Firm should have a clearly defined policy with respect to the amount of Concentration Risk it is prepared to run. Such a policy might, for example, include a cap on the amount of Collateral it would be prepared to take from a particular Issuer or market. The Authorised Firm should also take Collateral and purchased credit protection into account when assessing the potential concentrations in its overall credit profile.
              9. Notwithstanding the presence of Credit Risk mitigation considered for the purposes of calculating Credit RWA amounts, an Authorised Firm should continue to undertake a full Credit Risk assessment of the underlying Exposure.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.4

            (1) An Authorised Firm must be able to satisfy the DFSA that it has systems in place to manage potential concentration of risk arising from its use of guarantees and Credit Derivatives.
            (2) An Authorised Firm must be able to demonstrate how its strategy in respect of its use of Credit Risk mitigation techniques, and in particular use of Credit Derivatives and guarantees interacts with its management of its overall risk profile.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Collateral

          • PIB 4.13.4 Guidance

            In order to recognise the effects of Credit Risk mitigation of the types of Collateral set out in Rules PIB 4.13.5 to PIB 4.13.7, an Authorised Firm must ensure that the relevant requirements in PIB Rule 4.13.8 are complied with.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.5 PIB 4.13.5

            (1) For an Authorised Firm using the FCSA, eligible financial Collateral comprises:
            (a) cash (as well as certificates of deposit or other similar instruments issued by the Authorised Firm) on deposit with the Authorised Firm;
            (b) gold;
            (c) any debt security:
            (i) with an Original Maturity of one year or less that has a short-term Credit Quality Grade of 3 or better as set out in PIB section 4.12; or
            (ii) with an Original Maturity of more than one year that has a Credit Quality Grade of 4 or better as set out in PIB section 4.12 if it is issued by a central government or Central Bank, or a Credit Quality Grade of 3 or better as set out in PIB section 4.12 if it is issued by any other entity;
            (d) any debt security issued by a bank that does not have an external credit assessment by a recognised ECAI if it fulfils the following criteria:
            (i) any debt security which is listed on a regulated exchange;
            (ii) the debt security is classified as senior debt, not subordinated to any other debt obligations of its Issuer;
            (iii) all other rated debt securities issued by the same Issuer which rank equally with the mentioned debt security have a long term or short term (as applicable) Credit Quality Grade by a recognised ECAI of "3" or better;
            (iv) the Authorised Firm is not aware of information to suggest that the issue would justify a Credit Quality Grade of below "3" as indicated in (iii) above; and
            (v) the Authorised Firm can demonstrate to the DFSA that the market liquidity of the debt security is sufficient to enable the Authorised Firm to dispose the debt security at market price.
            (e) any equity security (including convertible bonds) that is included in a main index; or
            (f) any Unit in a Collective Investment Fund where:
            (i) a price for the units is publicly quoted daily; and
            (ii) at least 90% of the deposited property of the Fund is invested in instruments listed in this Rule.
            (2) Cash-funded credit-linked notes issued by an Authorised Firm against Exposures in the Non-Trading Book which fulfil the criteria for eligible Credit Derivatives must be treated as cash collateralised transactions.
            (3) Cash, mentioned in (1)(a), includes cash on deposit, certificates of deposit or other similar instruments issued by the Authorised Firm that are held as Collateral at a third-party bank in a non-custodial arrangement and that are pledged or assigned to the Authorised Firm. This is subject to the pledge or assignment being unconditional and irrevocable. Under the FCSA, the risk weight to be applied to the Exposure covered by such Collateral must be the risk weight of the third-party bank.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.5 Guidance

              1. For the purposes of Rule PIB 4.13.5 and PIB 4.13.6, eligible financial Collateral excludes any T1 Capital instrument or T2 Capital instrument issued by any entity in the Financial Group of the Authorised Firm, which is held by the Authorised Firm or any of its Financial Group entities as Collateral.
              2. For an Authorised Firm using Units of a Fund under the FCSA approach, the use or potential use by that Fund of Derivative instruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the Units in that Fund from being recognised as eligible financial Collateral.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.6

            For an Authorised Firm using the FCCA, eligible financial Collateral comprises:

            (a) any instrument listed in PIB Rule 4.13.5;
            (b) any equity Security (including a convertible bond) that is traded on a regulated exchange;
            (c) any Unit in a Collective Investment Fund which invests in equity securities referred to in (b), where:
            (i) a price for the Units is publicly quoted daily; and
            (ii) at least 90% of the deposited property of the Fund is invested in instruments listed in this Rule and PIB Rule 4.13.5.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.7 PIB 4.13.7

            In the case of any Counterparty Risk Exposures in Rules PIB 4.13.5. and PIB 4.13.6 arising from an SFT which are included in the Trading Book, eligible financial Collateral includes all instruments which an Authorised Firm may include in its Trading Book.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.7 Guidance

              For an Authorised Firm using Units of a Fund under the FCSA approach, the use or potential use by that Fund of Derivative instruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the Units in that Fund from being recognised as eligible financial Collateral.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Requirements for Recognition of Collateral

          • PIB 4.13.8

            An Authorised Firm must ensure that the following requirements are complied with before it recognises the effects of Credit Risk mitigation of any Collateral:

            (a) the legal mechanism by which Collateral is pledged, assigned or transferred must confer on the Authorised Firm the right to liquidate or take legal possession of the Collateral, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the Counterparty (and, where applicable, of the custodian holding the Collateral);
            (b) the Authorised Firm has taken all steps necessary to fulfil those requirements under the law applicable to the Authorised Firm's interest in the Collateral for obtaining and maintaining an enforceable security interest by registering it with a registrar or for exercising a right to net or set off in relation to title transfer Collateral;
            (c) the credit quality of the Counterparty and the value of the Collateral do not have a material positive correlation;
            (d) securities issued by the Counterparty or any Closely Related Counterparty are not eligible;
            (e) the Authorised Firm has implemented procedures for the timely liquidation of Collateral to ensure that any legal conditions required for declaring default of Counterparty and liquidating the Collateral are observed, and that the Collateral can be liquidated promptly; and
            (f) where the Collateral is held by a custodian, the Authorised Firm has taken reasonable steps to ensure that the custodian segregates the Collateral from its own assets.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Guarantees

          • PIB 4.13.9 PIB 4.13.9

            (1) An Authorised Firm may recognise the effects of Credit Risk mitigation of a guarantee only if it is provided by any of the following entities:
            (a) central government or Central Bank;
            (b) MDB referred to in PIB Rule 4.12.8
            (c) International Organisations referred to in PIB Rule 4.12.9;
            (d) PSE;
            (e) banks and securities firms which qualify for inclusion in bank asset class; or
            (f) any other entity that has a Credit Quality Grade "3" or above.
            (2) An Authorised Firm must not recognise the effects of Credit Risk mitigation of a guarantee unless all of the following requirements are complied with:
            (a) the guarantee is an explicitly documented obligation assumed by the guarantor;
            (b) the guarantee represents a direct claim on the guarantor;
            (c) the extent of the credit protection cover is clearly defined and incontrovertible;
            (d) other than in the event of non-payment by the Authorised Firm of money due in respect of the guarantee if applicable, there is an irrevocable obligation on the part of the guarantor to pay out a predetermined amount upon the occurrence of a credit event, as defined under the guarantee;
            (e) the guarantee does not contain any clause, the fulfilment of which is outside the direct control of the Authorised Firm, that:
            (i) would allow the guarantor to cancel the guarantee unilaterally;
            (ii) would increase the effective cost of the guarantee as a result of deteriorating credit quality of the underlying Exposure;
            (iii) could prevent the guarantor from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or
            (iv) could allow the maturity of the guarantee agreed ex-ante to be reduced ex-post by the guarantor;
            (f) the Authorised Firm is able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction on the default of, or non-payment by, the underlying obligor without first having to take legal action to pursue the underlying obligor for payment; and
            (g) the guarantee covers all types of payments that the underlying obligor is expected to make under the documentation governing the transaction, except in the case of accrued interest, accrued expenses or fees outstanding, where these are deemed immaterial.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.9 Guidance

              1. PIB Rule 4.13.9(2)(e) does not include any guarantee with a cancellation clause where it is provided that any obligation incurred or transaction entered into prior to any cancellation, unilateral or otherwise, continues to be guaranteed by the guarantor.
              2. The guarantee payments may be in the form of the guarantor making a lump sum payment of all monies to the Authorised Firm or the guarantor assuming the future payment obligations of the Counterparty covered by the guarantee, as specified in the relevant documentation governing the guarantee.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.10

            In addition to the requirements in PIB Rule 4.13.9, where an Authorised Firm has an Exposure that is protected by a guarantee or that is counter-guaranteed by a central government or Central Bank, a regional government or local authority or a PSE claims on which are treated as claims on the central government in whose jurisdiction they are established, a MDB or an international organisation to which a 0% risk weight is assigned under PIB section 4.12, an Authorised Firm may treat the Exposure as being protected by a direct guarantee from the central government or Central Bank in question, provided the following requirements are complied with:

            (a) the counter-guarantee covers all Credit Risk elements of the Exposure;
            (b) both the original guarantee and the counter-guarantee comply with all the requirements for guarantees set out in this section, except that the counter-guarantee need not be direct and explicit with respect to the original Exposure; and
            (c) the Authorised Firm is able to satisfy the DFSA that the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Derivatives

          • PIB 4.13.11

            (1) An Authorised Firm may recognise the effects of Credit Risk mitigation of a Credit Derivative only if it is provided by any of the following entities:
            (a) central government or Central Bank;
            (b) MDB referred to in Rules PIB 4.12.7 to PIB 4.12.9;
            (c) International Organisations referred to in PIB Rule 4.12.9;
            (d) PSE;
            (e) banks and securities firms which qualify for inclusion in bank asset class; or
            (f) any other entity that has a Credit Quality Grade "3" or better.
            (2) An Authorised Firm may recognise the effects of Credit Risk mitigation of only the following types of Credit Derivatives:
            (a) credit default swaps;
            (b) total return swaps;
            (c) credit linked notes which are cash funded; and
            (d) instruments that are composed of, or are similar in economic substance, to one or more of the Credit Derivatives in (a) to (c).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.12 PIB 4.13.12

            An Authorised Firm must not recognise the effects of Credit Risk mitigation of any Credit Derivative unless all of the following requirements are complied with:

            (a) the terms and conditions of any credit protection obtained via a Credit Derivative must be set out in writing by both the Authorised Firm and the provider of credit protection;
            (b) the Credit Derivative must represent a direct claim on the provider of credit protection;
            (c) the extent of the credit protection cover is clearly defined and incontrovertible;
            (d) other than in the event of non-payment by the Authorised Firm of money due in respect of the Credit Derivative, there is an irrevocable obligation on the part of the provider of the credit protection to pay out a pre-determined amount upon the occurrence of a credit event, as defined under the Credit Derivative contract;
            (e) the Credit Derivative contract must not contain any clause, the fulfilment of which is outside the direct control of the Authorised Firm, that:
            (i) would allow the provider of credit protection to cancel the credit protection cover unilaterally;
            (ii) would increase the effective cost of the credit protection cover as a result of deteriorating credit quality of the underlying Exposure;
            (iii) could prevent the provider of credit protection from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or
            (iv) could allow the maturity of the credit protection agreed ex-ante to be reduced ex-post by the provider of credit protection;
            (f) the credit events specified by the contracting parties must at a minimum cover:
            (i) failure to pay the amounts due under terms of the underlying Exposure that are in effect at the time of such failure (with a grace period, if any, that is closely in line with the grace period in the underlying Exposure);
            (ii) bankruptcy, insolvency or inability of the underlying obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
            (iii) restructuring of the underlying Exposure involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account);
            (g) the Credit Derivative must not terminate prior to the maturity of the underlying Exposure or expiration of any grace period required for a default on the underlying Exposure to occur as a result of a failure to pay;
            (h) a robust valuation process to estimate loss reliably must be in place in order to estimate loss reliably for any Credit Derivative that allows for cash settlement. There must be a clearly specified period for obtaining post-credit event valuations of the underlying obligation;
            (i) where the right or ability of the Authorised Firm to transfer the underlying Exposure to the credit protection provider is required for settlement, the terms of the underlying Exposure must provide that any required consent to such transfer may not be unreasonably withheld;
            (j) the identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the credit protection provider. The Authorised Firm must have the right or ability to inform the credit protection provider of the occurrence of a credit event; and
            (k) the underlying obligation and the reference obligation specified in the Credit Derivative contract for the purpose of determining the cash settlement value or the deliverable obligation or for the purpose of determining whether a credit event has occurred may be different only if:
            (i) the reference obligation ranks pari passu with or is junior to the underlying obligation; and
            (ii) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.12 Guidance

              1. An Authorised Firm should not recognise the effects of Credit Risk mitigation of a total return swap if it purchases credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the underlying asset that is protected (either through reductions in its marked-to-market value or by an addition to reserves).
              2. The DFSA would generally consider the requirements in (f) to have been complied with even if the requirements are not specifically set out so long as the obligations of the credit protection provider under the Credit Derivative contract would include those requirements.
              3. The DFSA would generally consider the cash settlement methodology provided in the ISDA Credit Derivatives Definitions as satisfying the requirement for obtaining post-credit event valuations of the underlying obligation.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Currency Mismatches

          • PIB 4.13.13

            (1) In the case where there is a currency mismatch between the credit protection and the underlying Exposure, an Authorised Firm must reduce the amount of the Exposure deemed to be protected by applying a haircut, as follows:
            Protected portion GA = G (1 - HFX)
            where:
            (a) G = notional amount of the credit protection; and
            (b) HFX = haircut appropriate for currency mismatch between the credit protection and underlying obligation Exposure based on a ten-business day holding period, assuming daily mark-to-market.
            (2) An Authorised Firm must determine HFX in the following manner:
            (a) if the Authorised Firm uses standard supervisory haircuts, HFX is 8%; and
            (b) if the Authorised Firm uses own-estimate haircuts, it must estimate HFX according to Rules PIB A4.3.6 to PIB A4.3.26 in PIB App4 based on a ten-business day holding period, assuming daily mark-to-market.
            (3) If the credit protection is not marked-to-market daily, HFX must be scaled in accordance with PIB Rule A4.3.25.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Maturity Mismatches

          • PIB 4.13.14

            An Authorised Firm may recognise the effects of Credit Risk mitigation for an Exposure where there is a maturity mismatch only if the Credit Risk mitigant has an Original Maturity of at least one year and a residual maturity of more than three months. For the purposes of calculating Credit RWA, a maturity mismatch occurs when the residual maturity of the Credit Risk mitigant is less than that of the underlying Exposure.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.15

            (1) An Authorised Firm must determine the maturity of the underlying Exposure and the maturity of the Credit Risk mitigant conservatively. The residual maturity of the underlying Exposure must be gauged as the longest possible remaining time before the Counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period.
            (2) In the case of Credit Risk mitigant, embedded options which may reduce the term of the credit protection must be taken into account so that the shortest possible residual maturity is used. Where a call is at the discretion of the protection seller, the residual maturity will be at the first call date. If the call is at the discretion of the Authorised Firm but the terms of the arrangement at origination of the Credit Derivative contain a positive incentive for the Authorised Firm to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.16 PIB 4.13.16

            (1) An Authorised Firm must calculate the value of the Credit Risk mitigation adjusted for any maturity mismatch (referred to as "PA"), using the following formula:
            PA = P(t-0.25)/(T-0.25)
            where —
            (a) P = value of the credit protection (e.g. Collateral amount, guarantee amount) adjusted for any haircuts;
            (b) t = min (T, residual maturity of the Credit Risk mitigant) expressed in years; and
            (c) T = min (5, residual maturity of the Exposure) expressed in years.
            (2) For residual maturity of the Exposure in the case of a basket of Exposures with different maturities, an Authorised Firm must use the longest maturity of any of the Exposures as the maturity of all the Exposures being hedged.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.16 Guidance

              The positive incentive for an Authorised Firm to call the transaction before contractual maturity as referred in PIB Rule 4.13.15 would be, for example, a situation wherein there is a step-up in cost in conjunction with a call feature or where the effective cost of cover remains the same even if credit quality remains the same or increases.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • On-balance Sheet Netting

          • PIB 4.13.17

            (1) An Authorised Firm may recognise as eligible the Netting of an on-balance sheet Exposure against an offsetting on-balance sheet item if the related Netting agreement meets the condition in PIB Rule 4.13.19.
            (2) Eligibility for Netting is limited to reciprocal cash balances between the Authorised Firm and its Counterparty. Only loans and deposits of the Authorised Firm may be subject to a modification of their Credit RWAs as a result of an on-balance sheet Netting agreement.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.18

            (1) Assets (loans) and liabilities (deposits) subject to recognised on-balance sheet Netting are to be treated as cash Collateral using the formula in PIB A4.3.6, under which an Authorised Firm may use zero haircuts for Exposure and Collateral.
            (2) When a currency mismatch exists, an Authorised Firm must apply the standard supervisory haircut of 8% for currency mismatch.
            (3) When a maturity mismatch exists between the off-setting items, an Authorised Firm must apply the Rules PIB 4.13.14 to PIB 4.13.16 to address the maturity mismatch.
            (4) Net credit Exposure, after taking into account recognised Netting, will be subject to the applicable CRW for the Counterparty.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.19 PIB 4.13.19

            For an Authorised Firm to recognise an on-balance sheet Netting agreement for the purposes of PIB Rule 4.13.17, all of the following conditions must be satisfied:

            (1)
            (a) both the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) are owing between the Authorised Firm and the same Counterparty;
            (b) the Authorised Firm nets the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) in a way that is consistent with its legal rights against the Counterparty;
            (c) a legal right of set-off exists;
            (d) the agreement between the Authorised Firm and the Counterparty does not contain a Walkaway Clause;
            (e) the Netting provided for in the agreement between the Authorised Firm and the Counterparty is effective and enforceable in the event of default, bankruptcy, liquidation or other similar circumstances affecting either the Counterparty or the Authorised Firm;
            (f) the on-balance sheet Exposure (asset) and the offsetting on-balance sheet item (liability) are monitored, controlled and managed on a net basis; and
            (g) the potential for roll-off Exposure is monitored and controlled where there is a maturity mismatch; and
            (2) it has, in respect of each relevant jurisdiction, a written and reasoned legal opinion which:
            (a) has been provided by an external source of legal advice of appropriate professional standing;
            (b) confirms that the requirements of (1)(a)-(e) are met for all relevant jurisdictions; and
            (c) is kept under review to ensure that it remains correct and up to date in the event of changes to the relevant laws.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.19 Guidance

              1. An Authorised Firm should assess whether any qualifications, assumptions or reservations contained in the legal opinion cast doubt upon the enforceability of the Netting agreement. If, as a result of the qualifications, assumptions or reservations, there is material doubt about the enforceability of the agreement, the Authorised Firm should assume that the requirements for Netting have not been met.
              2. An Authorised Firm using a standard form Netting agreement and a supporting legal opinion should ensure that the relevant requirements in Rules PIB 4.13.17 to PIB 4.13.19 are met. A standard form Netting agreement is a form of agreement which is prepared by a reputable, internationally recognised industry association and is supported by its own legal opinion. Where additional clauses are added to a standard form Netting agreement, the Authorised Firm should satisfy itself that the amended Netting agreement continues to meet the legal and contractual requirements in Rules PIB 4.13.17 to PIB 4.13.19. For instance, in such cases, an Authorised Firm may wish to obtain a second legal opinion to confirm that the relevant requirements in Rules PIB 4.13.17 to PIB 4.13.19 are still satisfied.
              3. PIB App4 sets out the calculation of the PFCE arising from OTC derivative contracts, on a net basis.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.14 PIB 4.14 Securitisation

        • Application

          • PIB 4.14.1

            This section applies to an Authorised Firm which:

            (a) acts as an Originator in a securitisation;
            (b) transfers Credit Risk on a single item or on a pool of items by any of the legal transfer methods set out in PIB Rule A4.10.1;
            (c) acts as a Sponsor in a securitisation; or
            (d) provides Credit Enhancement, liquidity support, or Underwriting or dealing facilities relating to the items being transferred.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Interpretation

          • PIB 4.14.2 PIB 4.14.2

            For the purposes of this chapter and PIB App4, "securitisation" includes Traditional Securitisation, Synthetic Securitisation and Re-securitisation, as defined below:

            (a) A Traditional Securitisation is a structure where the cash flow from an underlying pool of Exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of Credit Risk. Payments to the investors depend upon the performance of the specified underlying Exposures, as opposed to being derived from an obligation of the entity originating those Exposures. A Traditional Securitisation will generally assume the movement of assets off balance sheet.
            (b) A Synthetic Securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of Credit Risk where Credit Risk of an underlying pool of Exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) Credit Derivatives or guarantees that serve to hedge the Credit Risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool. A Synthetic Securitisation may or may not involve the removal of assets off balance sheet.
            (c) A Re-securitisation Exposure is a securitisation Exposure in which the associated underlying pool of Exposures is tranched and at least one of the underlying Exposures is a securitisation Exposure. In addition, an Exposure to one or more Re-securitisation Exposures is a Re-securitisation Exposure.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.3 Guidance

              The DFSA would treat other techniques to achieve the financing or re-financing of assets which are legally transferred to a scheme, by packaging them into a tradable form through the issue of Securities which are secured on the assets and serviced from the cashflows which they yield as "securitisation".

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Systems and Controls for the Use of Securitisations

          • PIB 4.14.3

            An Authorised Firm must implement and maintain appropriate risk management systems to identify, manage, monitor and, where applicable, control all risks in relation to a securitisation transaction whether the firm is an investor, Originator or Sponsor. In particular, such risk management systems should effectively address the following risks:

            (a) the liquidity and capital implications that may arise from the items returning to the balance sheet;
            (b) the Operational Risks that may arise under a securitisation; and
            (c) reputational risks that may arise as a result of its securitisation activities.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.4

            An Authorised Firm must have appropriate policies and procedures to ensure that the economic substance of the transaction is fully reflected in the process of managing the risks arising from such transactions. An Authorised Firm must have appropriate policies and procedures in place to document its systems and controls in relation to securitisation risks. These policies should include details on the capital effects of the securitisation as set out in this chapter.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.5 PIB 4.14.5

            An Authorised Firm must conduct periodic stress tests in relation to its securitisation activities and off balance sheet Exposures, including testing of future ability to transact securitisation as a means of Credit Risk mitigation or for liquidity purposes.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.5 Guidance

              1. The periodic stress testing in relation to securitisation activities referred to in PIB Rule 4.14.5 should consider the firm-wide impact of those activities and Exposures in stressed market conditions and the implications for other sources of risk. Such stress tests should include both existing securitisation Exposures and transactions in the pipeline, as there is a risk of the pipeline transactions not being completed in a stressed market scenario.
              2. The frequency and extent of stress testing to fulfil the requirements of PIB Rule 4.14.5 should be determined on the basis of the materiality of the Authorised Firm's securitisation volumes and its off-balance sheet Exposures.
              3. An Authorised Firm should have procedures in place to assess and respond to the results produced from the stress testing and these should be taken into account under the ICAAP.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.6 PIB 4.14.6

            In order to qualify for using the Rules specified in this section, and particularly the risk weighting approach outlined below, an Authorised Firm must demonstrate the following:

            (a) a comprehensive understanding of the risk characteristics of its individual securitisation Exposures, whether on balance sheet or off balance sheet, as well as the risk characteristics of the pools underlying securitisation Exposures;
            (b) ability to access the performance information on the underlying pools on an on-going basis in a timely manner; and
            (c) a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the Authorised Firm's Exposure to the transaction, such as waterfall triggers, Credit Enhancements, liquidity enhancements, market value triggers and deal specific definitions of default.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.6 Guidance

              1. An Authorised Firm which is an investor, Originator or Sponsor of a Securitisation should fully understand the risks it has assumed in order to ensure that it can accurately determine the Capital Requirements for the Exposures arising from the securitisation in accordance with the Rules in this section.
              2. For the purposes of PIB Rule 4.14.6(b) information should include the percentage of loans 30,60, 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score etc. For Re-securitisations, Authorised Firms should have information relating to not only the underlying securitisation transactions but also the characteristics and performance of the underlying pools of such transactions.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.7 PIB 4.14.7

            Where an Authorised Firm is either an Originator or a Sponsor of a Traditional Securitisation or a Synthetic Securitisation:

            (a) the Authorised Firm intending to conduct the securitisation must notify the DFSA at least 30 days in advance of the proposed execution of the securitisation;
            (b) the Authorised Firm conducting the securitisation must calculate its Credit RWAs for all resultant Exposures from that securitisation, in accordance with PIB section 4.8, provided the requirements of this section are met; and
            (c) the Authorised Firm conducting the securitisation must produce documentation reflecting the execution and economic substance of the transaction.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.7 Guidance

              The notification made to the DFSA under (a) should include, inter alia, amounts of assets subject to securitisation, amounts retained, details of securitisation including legal structure, rating, tranches, details of legal transfer and any Credit Risk mitigation applied and implications on the capital and liquidity position on the Authorised Firm.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of Credit RWA Arising from Securitisations

          • PIB 4.14.8 PIB 4.14.8

            An Authorised Firm must calculate the Credit RWA amounts for Exposures arising from securitisations according to the requirements in this section.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.8 Guidance

              1. An Authorised Firm should apply the securitisation framework set out in this section for determining the regulatory Capital Requirements on Exposures arising from traditional and Synthetic Securitisations or similar structures that contain features common to both.
              2. This section sets out the requirements for Originators, Authorised Firms which transfer Credit Risk from their balance sheets and Sponsors in a securitisation transaction involving Non-Trading Book Exposures. This section also sets out the methodologies for calculation of RWA amounts for securitisation Exposures. The Rules setting out the methodologies for calculation of Market Risk Capital Requirement amounts for securitisation Exposures held in the Trading Book are specified in PIB chapter 5 and PIB App5 of this module.
              3. As securitisations may be structured in many different ways, an Authorised Firm engaging in the activities relating to securitisations (whether traditional or Synthetic) must ensure that the economic substance of the transaction is fully considered, and reflected, in determining the capital treatment of a securitisation, rather than relying on the legal form of the Securitisation.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.9

            An Authorised Firm is required, subject to PIB Rule 4.14.12, to include all securitisation Exposures in its calculation of Credit RWAs relating to securitisations, including the following:

            (a) those arising from the provision of Credit Risk mitigants to a securitisation;
            (b) investments in asset backed Securities;
            (c) retention of a subordinated tranche;
            (d) extension of a liquidity facility; and
            (e) extension of Credit Enhancement.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.10

            An Authorised Firm must include in its calculation of Credit RWA all of its securitisation Exposures held in the Non-Trading Book, except for those securitisation Exposures which the Authorised Firm is required to include as deductions from T1 Capital and deductions from T2 Capital.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.11

            Repurchased securitisation transactions must be treated as retained securitisation Exposures.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Deductions

          • PIB 4.14.12

            (1) An Authorised Firm may deduct SE Exposures which it has chosen not to treat in accordance with Rules PIB 4.14.8 to PIB 4.14.11 from Capital Resources — 100% from CET1.
            (2) Credit-Enhancing Interest-Only Strips (net of the deductions from CET1 Capital required at PIB Rule 4.14.13) are deducted 100% from CET1 Capital.
            (3) Deductions from capital may be calculated net of specific provisions taken against relevant securitisation Exposures.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.13 PIB 4.14.13

            An Authorised Firm must include as deductions from CET1 Capital any increase in issued capital or reserves resulting from a securitisation, such as that associated with expected future margin income resulting in a gain-on-sale that is recognised as issued capital or reserves.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.13 Guidance

              Gain-on-sale arises when there has been an increase in equity of the Authorised Firm associated with recognising the discounted value of the expected future margin income as part of the regulatory capital.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.14

            An Authorised Firm must assign a securitisation Exposure to a Credit Quality Grade based on the external credit assessment (where available) that is applicable to the securitisation Exposure in accordance with relevant Rules in this chapter.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Implicit Support

          • PIB 4.14.15

            An Originator or a Sponsor of a securitisation must not provide Implicit Support to a securitisation transaction with a view to reducing potential or actual losses to investors outside of its contractual obligations;

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.16

            If an Originator fails to comply with PIB Rule 4.14.15 in respect of a securitisation, it:

            (a) must include all the underlying Exposures of the securitisation in its calculation of Credit RWAs as if those Exposures had not been Securitised and were on the balance sheet of the Authorised Firm;
            (b) must not recognise any gain-on-sale of assets to the securitisation; and,
            (c) must disclose to investors that the Authorised Firm has provided non contractual support and the regulatory capital impact of doing so.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Requirements in Order for a Traditional Securitisation to be Excluded from the Calculation of RWA

          • PIB 4.14.17

            (1) An Authorised Firm which is an Originator or a Sponsor of a Traditional Securitisation may exclude Securitised Exposures from the calculation of Credit RWA amounts only if all of the conditions detailed in PIB Rule A4.10.1 have been complied with.
            (2) An Authorised Firm meeting the requirements specified in PIB Rule A4.10.1 must hold regulatory capital against any securitisation Exposures it retains.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Requirements in Order for a Synthetic Securitisation to be Excluded from the Calculation of RWA

          • PIB 4.14.18 PIB 4.14.18

            (1) An Authorised Firm which is an Originator or a Sponsor of a Synthetic Securitisation may recognise the effects of Credit Risk mitigation of the Synthetic Securitisation in calculating its SE Exposure RWAs, only if:
            (a) all of the conditions detailed in PIB Rule A4.10.2 have been complied with;
            (b) the effects of Credit Risk mitigation are obtained through eligible credit protection, eligible financial Collateral or both; and
            (c) Credit Risk is transferred to third parties.
            (2) In relation to (b), the Credit Risk mitigation techniques used must meet the requirements of PIB section 4.13.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.18 Guidance

              In relation to (1)(c) the transferor is deemed to have effective control over the transferred Credit Risk Exposures if it has the ability to repurchase the assets, or is obliged to retain the risk of the transferred assets. This does not include the retention of servicing rights.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.19

            (1) An Authorised Firm meeting the conditions in PIB Rule 4.14.18 must still hold regulatory capital against any securitisation Exposures it retains.
            (2) The Authorised Firm may recognise the effects of Credit Risk mitigation of eligible financial Collateral pledged by any SPE, but it may not recognise any SPE which is an Issuer of securitisation Exposures as an eligible protection provider.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Operational Requirements for Use of External Credit Assessments

          • PIB 4.14.20

            The external credit assessment used for determining the applicable risk weight for a CR Exposure must be determined by taking into account the entire amount of Credit Risk (principal and interest) an Authorised Firm is exposed to.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.21

            Credit assessments can only be considered from an ECAI, and must meet the following criteria:

            (a) any credit assessments used for the purposes of risk weighting must be publicly available;
            (b) the external credit rating agencies must have expertise and market acceptance in rating securitisations of the nature being used for risk weighting purposes;
            (c) Authorised Firms must apply external credit rating agency ratings consistently to all tranches of securitisations;
            (d) where an Exposure has two ratings from external credit rating agencies the less favourable rating must be used; and
            (e) where an Exposure has more than two assessments by external credit rating agencies the two most favourable ratings can be selected, the review of these assessments is then determined in line with (d).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.22

            Where any Credit Risk mitigation has been considered as part of any rating applied to a tranche of a securitisation, the risk weighting should be used and no additional capital recognition is permitted.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.23

            An Authorised Firm must treat any securitisation Exposure as an unrated Exposure where:

            (a) the external credit assessment incorporates the credit protection provided directly to the SPE by a protection provider which is not an eligible protection provider;
            (b) the external credit assessment is at least partly based on unfunded support provided by the Authorised Firm itself (e.g. if an Authorised Firm buys ABCP) where it provides an unfunded securitisation Exposure extended to the ABCP Programme, such as a liquidity facility or Credit Enhancement, and that Exposure plays a role in determining the credit assessment on the ABCP, the Authorised Firm must treat the ABCP as if it were not rated and continue to hold capital against the other securitisation Exposures it provides);
            (c) the Credit Risk mitigant is not obtained by the SPE but is separately obtained and applied to a specific securitisation Exposure (e.g. a particular tranche); or
            (d) the Credit Risk mitigation does not meet the eligibility criteria for mitigation specified in PIB section 4.13.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.24

            Where Credit Risk mitigation is applied to a specific Exposure within a securitisation the Authorised Firm must treat the Exposure as unrated, and then use the mitigation as set out in PIB section 4.13 should the Rules contained in that section apply.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.25

            An Authorised Firm must not use an external credit rating agency rating for risk weighting purposes where the assessment is at least partly based on unfunded support provided by the Authorised Firm itself.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.26

            The treatment outlined in PIB Rule 4.14.24 also applies to Exposures in the Authorised Firm's Trading Book. An Authorised Firm's Capital Requirement for such Exposures held in the Trading Book can be no less than the amount required under the Non-Trading Book.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of RWA Amounts for Securitisation Exposures

          • PIB 4.14.27

            (1) In order to calculate the RWA amount for a securitisation position, the relevant risk weight must be assigned to the Exposure value of the position in accordance with this section, based on the credit quality of the position.
            (2) For the purposes of this Rule, the credit quality of a position must be determined by reference to the applicable credit quality assessment from a recognised external credit rating agency.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.28

            In cases where there are Exposures to different tranches in a securitisation, the Exposure to each tranche must be considered a separate securitisation position.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.29

            The Exposure value of an off-balance sheet securitisation position must, subject to PIB A4.2.2, be its nominal value multiplied by a CCF of 100%, wherever applicable.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.30

            The Exposure value of a securitisation position arising from a financial derivative must be determined in accordance with Rules PIB 4.6.14 to PIB 4.6.21 dealing with treatment of financial derivatives.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Assigning Risk Weights

          • PIB 4.14.31

            An Authorised Firm must assign a risk weight for any SE Exposure in accordance with the tables below, to calculate the Credit RWA amounts for that Exposure.

            Risk Weights for Long-Term securitisation Exposures

            Long Term rating category
            Credit Quality Grade 1 2 3 4 5 and above including unrated
            Risk Weight to be applied to securitisation Exposures(excluding Re-securitisation Exposures) 20% 50% 100% 350% 1000% or Deduction from Capital Resources
            Risk weight applied to Re-securitisation Exposures 40% 100% 225% 650% 1000% or Deduction from Capital Resources

            Risk Weights for Short-Term securitisation Exposures

            Short-term rating category
            Credit Quality Grade I II III IV and above including unrated
            Risk Weight to be applied 20% 50% 100% 1000% or Deduction from Capital Resources
            Risk Weight applied to Re-securitisation Exposures 40% 100% 225% 1000% or deduction from Capital Resources
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.32

            (1) In respect of securitisation positions which are assigned a 1000% risk weighting pursuant to the tables in PIB Rule 4.14.31, an Authorised Firm may as an alternative to including the position in its calculation of Credit RWA amounts, deduct from its CET1 Capital the Exposure value of such positions.
            (2) For the purposes of this Rule, the calculation of the Exposure value may reflect eligible funded credit protection consistent with applicable Rules in this chapter.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.33

            For an Authorised Firm that is an Originator or Sponsor of a securitisation, the Credit RWA amounts calculated for its securitisation positions may be limited to the RWA amounts which would be calculated for the SE Exposures had they not been Securitised subject to the presumed application of a 150% risk weight to all past due items and items belonging to regulatory high risk categories.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.34

            [Not currently in use]

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.35

            [Not currently in use]

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exceptions to Deduction of Unrated Securitisation Exposures

          • PIB 4.14.36

            In accordance with the tables under PIB Rule 4.14.31, all unrated securitisation positions must be deducted or risk weighted at 1000% with the following exceptions:

            (a) most senior Exposure in a securitisation;
            (b) Exposures that are in a second loss position or better of an ABCP and meet the requirements of PIB Rule 4.14.41; and
            (c) eligible liquidity positions.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Most Senior Exposure in a Securitisation

          • PIB 4.14.37

            (1) Where an Authorised Firm holds or guarantees unrated securitisation Exposure from the most senior tranche in a securitisation, the Authorised Firm may apply the "look through" treatment, provided the composition of the underlying pool of Exposures securitised is known at all times and the Authorised Firm is able to determine the applicable risk weights for the underlying Exposures.
            (2) An Authorised Firm applying the look-through treatment to an unrated securitisation Exposure, pursuant to (1), must apply to that securitisation Exposure the weighted average of the risk weights of the underlying Exposures determined in accordance with the Rules in this chapter, multiplied by a concentration factor.
            (3) For the purposes of (2), the concentration factor is calculated as the sum of the nominal amounts of all the tranches in that securitisation divided by the sum of the nominal amounts of the tranches junior to, or pari-passu with, the tranche in which the position is held, including that tranche itself. The resulting weighted average risk weight must not be higher than 1000% or lower than the risk weight applicable to a more senior tranche which is rated.
            (4) Where the Authorised Firm is unable to determine the risk weights for the underlying Exposures in accordance with this Rule, the unrated securitisation position will not be eligible for the relief and must be deducted from CET 1 Capital of the Authorised Firm.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.38

            An Authorised Firm wishing to apply the treatment referred to in PIB Rule 4.14.37 must notify the DFSA, in writing, at least 30 days in advance, of the intention to adopt this treatment. The notification should include the treatments being adopted and the weightings applied under the provision.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.39

            The resulting weighted average risk weight must not be higher than 1000% or lower than the risk weight applicable to a more senior tranche which is rated.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.40

            An Authorised Firm must have systems and controls in place to monitor effectively the composition of Exposures where the look-through provision has been applied on an ongoing basis.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exposures that are in a Second Loss Position or Better of an ABCP

          • PIB 4.14.41

            An Authorised Firm may apply a risk weight of 100% or the highest risk weight assigned to any of the underlying Exposures in the ABCP Programme, whichever is higher, to an unrated securitisation Exposure arising from the ABCP Programme, provided the securitisation position complies with the following conditions:

            (a) the subject securitisation Exposure must be in a tranche which is economically in a second loss position or better and the First Loss Position must provide meaningful credit protection to the second loss tranche;
            (b) the associated Credit Risk of the securitisation Exposure is the equivalent of a Credit Quality Grade of III or better in the short-term rating category; and
            (c) the Authorised Firm must not hold a position in the First Loss Position.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Eligible Liquidity Positions

          • PIB 4.14.42

            An Authorised Firm providing an unrated eligible liquidity facility may assign to the resulting securitisation Exposure the highest risk weight that would be applied to any of the underlying Exposures covered by the facility.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.43

            (1) An off balance sheet SE Exposure will receive a 100% CCF unless:
            (a) the Exposure qualifies as an eligible liquidity facility, or
            (b) the Exposure is an eligible Servicer cash advance facility.
            (2) In relation to (1), an eligible Servicer cash advance facility is a facility provided to a securitisation in order to ensure uninterrupted flow of payments to investors. As long as the Servicer is entitled to full reimbursement and this right is senior to all other claims on cash flows from the underlying pool of Exposures, and where these facilities meet the requirements of PIB 4.14.44 and are unconditionally cancellable at any time, any undrawn commitments can then have a 0% CCF applied.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.44

            (1) For the purposes of PIB Rule 4.14.42, an Authorised Firm may treat an Exposure as an eligible liquidity facility provided the following requirements are met:
            (a) the liquidity facility documentation must clearly identify and limit the circumstances under which it may be drawn;
            (b) draws must be limited to the amount that is likely to be repaid from the liquidation of the underlying Exposures and any seller provided Credit Enhancements;
            (c) the facility must not provide credit support by covering for any losses incurred in the underlying pool of Exposures prior to drawdown;
            (d) the facility must not be structured to provide regular or permanent funding;
            (e) the facility must be subject to an asset quality test to preclude it being used to cover Credit Risk Exposures that are in default;
            (f) where the facility is used to fund externally rated Securities the facility can only be used to fund Securities that are externally rated Investment Grade at the time of funding;
            (g) the facility cannot be drawn after all Credit Enhancements from which the liquidity facility would benefit have been exhausted; and
            (h) repayment of draws of the facility cannot be subordinated to any interests of any note holder in the programme or be subject to deferral or waiver.
            (2) Where the Exposure meets the requirements as set out in (1), the following CCF will apply:
            (a) 50% to the eligible liquidity facility regardless of maturity; and
            (b) 100% if an external rating of the liquidity facility is used for the risk weighting.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.45

            (1) An Authorised Firm which provides credit protection for a basket of reference Exposures through an unrated first-to-default Credit Derivative may apply to the securitisation Exposure the aggregate of the risk weights that would be assigned to the reference Exposures, provided that the resulting Capital Requirement does not exceed the notional amount of the credit protection.
            (2) An Authorised Firm which provides credit protection for a basket of reference Exposures through an unrated second-to-default Credit Derivative may apply the treatment referred to in (1), except that in aggregating the risk weights, the reference Exposure with the lowest risk-weighted amount may be excluded.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Overlapping Exposures

          • PIB 4.14.46 PIB 4.14.46

            (1) Where an Authorised Firm has two or more overlapping Exposures to a securitisation, the firm must, to the extent that the positions overlap, include in its calculation of Credit RWA amounts only the Exposure, or portion of the Exposure, producing the higher Credit RWA amounts.
            (2) For the purposes of (1), overlapping Exposures result where an Authorised Firm provides two or more facilities (whether they are liquidity facilities or Credit Enhancements) in relation to a securitisation that can be drawn under various conditions with different triggers, with the result that the Authorised Firm provides duplicate coverage to the underlying Exposures. The facilities provided by the Authorised Firm may overlap since a draw on one facility may preclude (in part) a draw on the other facility.
            (3) Where the overlapping Exposures are subject to different conversion factors the Authorised Firm must apply the higher of the conversion factors to the Exposure.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.46 Guidance

              The firm may also recognise such an overlap between capital charges for Specific Risk in relation to positions in the trading book and capital charges for positions in the Non-Trading Book, provided that the firm is able to calculate and compare the capital charges for the relevant positions.

              However, if overlapping facilities are provided by different Authorised Firms, each Authorised Firm must calculate Capital Requirement for the maximum amount of its Exposure.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Risk Mitigation

          • PIB 4.14.47

            Where an Authorised Firm obtains credit protection on a securitisation Exposure, the calculation of Credit RWA amounts must be in accordance with the Rules in Credit Risk mitigation in PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.48

            Where an Authorised Firm provides credit protection to a securitisation Exposure it must calculate a Capital Requirement as if it were an investor in the securitisation in line with PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.49

            An Authorised Firm must not recognise any SPE which is an Issuer of securitisation Exposures, as an eligible credit protection provider. Guarantees provided must meet the requirements of PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.50

            For the purpose of setting regulatory capital against a maturity mismatch, the Capital Requirement must be determined in accordance with PIB section 4.13. When Exposures being hedged have different maturities, the longest maturity must be used. Maturity of credit protection must be calculated in accordance with PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Capital Requirements for Securitisations with Early Amortisation Provisions

          • PIB 4.14.51 PIB 4.14.51

            An Authorised Firm which is the Originator or Sponsor of a securitisation involving revolving Exposures as well as an Early Amortisation provision, must calculate an additional RWA amount in accordance with PIB Rule 4.14.57 to address the possibility that its Credit Risk Exposure levels may increase following the operation of the Early Amortisation provision.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.51 Guidance

              1. This section sets out the methodology for calculation of the Credit RWA amount by an Originator, when it sells revolving Exposures into a securitisation that contains an Early Amortisation provision.
              2. Early Amortisation of the Securities describes the process whereby the repayment of the investors' interest is brought forward upon the occurrence of specified events. Events that are economic in nature by reference to the financial performance of the transferred assets are known as economic triggers.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.52

            (1) An Authorised Firm which is the Originator or Sponsor of a securitisation involving revolving Exposures, must calculate Credit RWA amounts in respect of the total Exposure related to a securitisation (both drawn and undrawn balances) when:
            (a) the Authorised Firm sells Exposures into a structure that contains an Early Amortisation feature; and
            (b) the Exposures are of a revolving nature.
            (2) Where the underlying pool of a securitisation comprises revolving and term Exposures, an Authorised Firm must apply the amortisation treatment outlined below for determining applicable regulatory capital only to that portion of the underlying pool containing revolving Exposures.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.53 PIB 4.14.53

            An Authorised Firm which is the Originator of a Revolving Securitisation that includes economic triggers for Early Amortisation may regard the Exposures as transferred for the period up to the point of repayment, provided that:

            (a) during the amortisation period there is full sharing of interest, principal, expenses, losses and recoveries; and
            (b) the Authorised Firm's risk management system provides warning indicators when economic or non-economic triggers may be activated.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.53 Guidance

              Examples of such triggers include tax events, legal changes resulting in an Authorised Firm's non-performance in its role as a servicing agent, and triggers relating to the insolvency of the Originator.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.54

            An Authorised Firm is not required to calculate a Capital Requirement for Early Amortisation in the following situations:

            (a) replenishment structures where the underlying Exposures do not revolve and the Early Amortisation ends the ability of the Authorised Firm to add new Exposures;
            (b) where the risk associated with revolving assets containing amortisation features that mimic term structures, where the risk does not return to the Authorised Firm;
            (c) structures where the Authorised Firm securitises one or more credit lines and where investors remain fully exposed to future draws by borrowers so that the risk on the underlying facilities does not return to the Originator even after an Early Amortisation event has occurred; or
            (d) where the Early Amortisation clause is solely triggered by events not related to the performance of the Securitised assets or the Authorised Firm, such as material changes in tax laws or regulations.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.55

            For an Authorised Firm subject to the Capital Requirement referred to in PIB Rule 4.14.51, the maximum Credit RWA calculated under that Rule must not exceed the greater of the following:

            (a) the RWA amounts calculated in respect of its positions in the investors' interest; or
            (b) the RWA amounts that would be calculated in respect of the Securitised Exposures, if those had not been securitised.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.56

            An Authorised Firm must deduct from its CET1 Capital any gain-on-sale and Credit-Enhancing Interest-Only Strips arising from any securitisation subject to the provisions of the Rules above.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of Credit RWA Amounts for Securitisation Positions Subject to Early Amortisation Clause

          • PIB 4.14.57 PIB 4.14.57

            In regard to securitisation positions subject to an Early Amortisation clause, the Credit RWA amounts for an Authorised Firm acting as the Originator are calculated as the product of the following:

            (a) the investors' interest
            (b) the appropriate CCF (in accordance with the table in PIB Rule 4.14.61); and
            (c) the appropriate risk weight for the underlying Exposure type.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.57 Guidance

              In relation to PIB Rule 4.14.57(c), the Authorised Firm should also consider whether a line, or facility, is committed or uncommitted. A line is considered to be uncommitted if it is unconditionally cancellable without prior notice by the Authorised Firm. They also differ according to whether the Securitised Exposures are committed retail credit lines or credit lines (such as revolving credit facilities).

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.58

            (1) An Early Amortisation provision that does not satisfy the conditions for a Controlled Early Amortisation provision will be treated as a non-Controlled Early Amortisation provision.
            (2) For the purpose of (1), the conditions for a Controlled Early Amortisation provision are as follows:
            (a) the Authorised Firm must have an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an Early Amortisation;
            (b) throughout the duration of the transaction, including the amortisation period, there is the same pro rata sharing of interest, principal, expenses, losses and recoveries based on the firm's and investors' relative shares of the receivables outstanding at the beginning of each month;
            (c) the firm must set a period for amortisation that would be sufficient for at least 90% of the total debt outstanding at the beginning of the Early Amortisation period to have been repaid or recognised as in default; and
            (d) the pace of repayment should not be any more rapid than would be allowed by straight-line amortisation over the period set out in (c).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.59

            For uncommitted retail credit lines in securitisations containing Controlled Early Amortisation which is triggered by the Excess Spread level falling to a specified level, an Authorised Firm must compare the three month average Excess Spread level with the Excess Spread levels at which the Excess Spread is required to be trapped.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.60

            Where the securitisation does not require Excess Spread to be trapped, the trapping point is deemed to be 4.5 percentage points greater than the Excess Spread level at which Early Amortisation is triggered.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.61

            An Authorised Firm must divide the Excess Spread level by the transaction's Excess Spread trapping point to determine the appropriate segments and apply corresponding conversion factors as set out in the following table:

            Controlled Early Amortisation features
              Uncommitted Committed
            Retail Credit Lines 3 Month average Excess Spread CCF 90%
            133.33% of trapping point or more 0%
            <133.33% to 100% of trapping point 1%
            <100% to 75% of trapping point 2%
            <75% to 50% trapping point 10%
            <50% to 25% of trapping point 20%
            <25% 40%
            Non-retail credit lines 90% 90%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Non-Controlled Early Amortisation

          • PIB 4.14.62

            In regard to non-Controlled Early Amortisation, an Authorised Firm must apply the same steps as set out at Rules PIB 4.14.59 to PIB 4.14.61 and determine appropriate segments and apply the corresponding conversion factors as set out in the following table:

            Non-Controlled Early Amortisation features
              Uncommitted Committed
            Retail Credit Lines 3 Month average Excess Spread CCF 100%
            133.33% of trapping point or more 0%
            <133.33% to 100% of trapping point 5%
            <100% to 75% of trapping point 15%
            <75% to 50% trapping point 50%
            <50% of trapping point 100%
            Non-retail credit lines 100% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Transfers to Special Purpose Entities (SPEs)

          • PIB 4.14.63

            An Authorised Firm need not include in its calculation of Capital Resources or Credit RWA amounts, assets transferred to:

            (a) an SPE; or
            (b) any Person, if the transfer is in connection with a securitisation under which the Issuer of the Securities is an SPE;

            provided that:

            (c) the Authorised Firm does not own any share or proprietary interest in the SPE;
            (d) no more than one member of the Governing Body of the SPE is an officer, partner, or Employee of the Authorised Firm;
            (e) the SPE does not have a name that implies any connection with the Authorised Firm or any other member of the Authorised Firm's Group;
            (f) the Authorised Firm does not fund the SPE except where permitted under the requirements for Credit Enhancement below;
            (g) the Authorised Firm does not provide temporary finance to the SPE to cover cash shortfalls arising from delayed payments or non-performance of loans transferred except where it meets the requirements for liquidity support below;
            (h) the Authorised Firm does not bear any of the recurring expenses of the SPE; and
            (i) any agreements between the Authorised Firm and the SPE are at market rates and at arm's length.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.64

            Where an Originator acts as Underwriter for the Securities issued, the underlying items will not be regarded as being transferred until 90% of the total issuance has been sold to third parties.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Dealing

          • PIB 4.14.65

            An Originator dealing in Securities which would attract a Credit Quality Grade of 4 or better and issued by an SPE must deduct any holdings in such Securities from its CET1 Capital unless the holding is subject to:

            (a) an ongoing limit of 3% of the Securities issued; and
            (b) a limit of 10% of the Securities issued for a period of five business days:
            (i) immediately following close of the transaction; or
            (ii) in the case of Revolving Securitisations only, at the beginning of the scheduled amortisation period.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.66

            An Authorised Firm acting as the Originator and holding in excess of the dealing limits in PIB Rule 4.14.65 must either:

            (a) where the holding is less than 10%, deduct from its CET1 Capital the excess over the dealing limit; or
            (b) where the holding is greater than 10%, regard the transferred risks associated with the items as being back on its balance sheet.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.67

            An Authorised Firm acting as the Originator must not deal in the Securities during the amortisation period.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.68

            An Authorised Firm acting as the Sponsor dealing in the Securities issued by the SPE must include these Securities in the calculation of its Credit RWAs.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.69

            An Authorised Firm involved in Synthetic Securitisations must seek individual guidance on a case-by-case basis from the DFSA regarding the regulatory treatment of such transactions.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Eligible Financial Collateral under FCSA Approach

          • PIB 4.14.70 PIB 4.14.70

            An Authorised Firm which has taken eligible financial Collateral for an SE Exposure and is using the FCSA may recognise the effect of the eligible financial Collateral as follows:

            (a) break down the SE Exposure into:
            (i) a collateralised portion with E equal to the latest fair market value of the eligible financial Collateral; and
            (ii) an uncollateralised portion whose Exposure value equals the E of the SE Exposure less the latest fair market value of the eligible financial Collateral; and
            (b) apply the CRW that is applicable to the eligible financial Collateral to the collateralised portion calculated in accordance with (a)(i) to calculate the Credit RWA amount of the collateralised portion as though the Authorised Firm had a direct Exposure to the eligible financial Collateral; and
            (c) either:
            (i) apply the CRW that is applicable to the SE Exposure to the uncollateralised portion calculated in accordance with (a)(ii) to calculate the Credit RWA amount of the uncollateralised portion; or
            (ii) include the uncollateralised portion as a deduction from CET1 Capital.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.70 Guidance

              Collateral in the context of a SE Exposure refers to assets used to hedge the Credit Risk of a securitisation Exposure rather than the underlying Exposures of the securitisation, including Collateral pledged by an SPE.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.15 PIB 4.15 Concentration Risk

        • Applicability and Limits

          • PIB 4.15.1

            This section applies with respect to Trading Book transactions as calculated in PIB App2 and Non-Trading Book transactions as calculated in PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.2

            For the purposes of this section an Exposure that arises in the Trading Book is calculated by summing the following:

            (a) the net positive position (long positions net of short positions) for each financial instrument as set out in Rules PIB A4.11.10 to PIB A4.11.28;
            (b) the Authorised Firm’s net Underwriting Exposures for any Counterparty; and
            (c) any other Exposures arising from transactions, agreements and contracts that would give rise to Counterparty Credit Risk.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB 4.15.3

            For the purposes of this section an Authorised Firm must:

            (a) identify its Exposures;
            (b) identify its Counterparties, including whether any are Closely Related to each other or Connected to the Authorised Firm;
            (c) measure the size of its Exposures;
            (d) establish the value of its Exposures;
            (e) determine the size of its Exposures as a proportion of its Capital Resources;
            (f) identify whether it has Exposures which are subject to the requirements of PIB section 4.13 (Credit Risk mitigation);
            (g) identify which, if any, of its Exposures are exempt in accordance with PIB section A4.11 from the limits set out in Rules PIB 4.15.4 to PIB 4.15.7;
            (h) aggregate its Exposures to the same Counterparty or group of Closely Related Counterparties or group of Connected Counterparties;
            (i) monitor and control its Exposures on a daily basis within the Concentration Risk limits; and
            (j) notify the DFSA immediately of any breach of the limits set out in this section and confirm it in writing.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Large Exposure Limits

          • PIB 4.15.4

            A Large Exposure of an Authorised Firm means a total Exposure which is equal to or exceeds 10% of the firm's Tier 1 Capital, to any Counterparty, Connected Counterparty, group of Connected Counterparties, or group of Closely Related Counterparties, whether in the Authorised Firm's Trading Book or Non-Trading Book, or both.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB 4.15.5

            (1) Subject to IFR Rule 5.4.15, an Authorised Firm must ensure that Exposures in its Non-Trading Book and, subject to PIB Rule 4.15.6, Trading Book to a Counterparty or to a group of Closely Related Counterparties or to a group of Connected Counterparties, after taking into account the effect of any eligible Credit Risk mitigations, do not exceed 25% of its Tier 1 Capital, except as otherwise provided in (2) or required by the DFSA under (3).
            (2) An Authorised Firm’s Exposure must not exceed 15% of its Tier 1 Capital if the Authorised Firm is a G-SIB and the Exposure is to another G-SIB, or a subsidiary of a G-SIB, in or outside the DIFC.
            (3) An Authorised Firm which is a D-SIB must, if required in writing by the DFSA, apply an Exposure limit of between 15% to 25% of its Tier 1 Capital as specified by the DFSA in the requirement, where the Exposure is to another D-SIB, or to a subsidiary of a D-SIB, in or outside the DIFC.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB 4.15.6

            Where an Authorised Firm's Trading Book Exposure to a Counterparty or to a group of Closely Related Counterparties or to a group of Connected Counterparties, on its own or when added to any Non-Trading Book Exposure, is likely to exceed 25% of its Tier 1 Capital, the Authorised Firm must immediately give the DFSA written notice, explaining the nature of its Trading Book Exposure and seeking specific guidance from the DFSA regarding the prudential treatment of any such Exposure.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB 4.15.7 PIB 4.15.7

            Subject to IFR Rule 5.4.16 an Authorised Firm must ensure that the sum of its Large Exposures does not exceed 800% of its Tier 1 Capital.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

            • PIB 4.15.7 Guidance

              1. Exposures can arise in the Non-Trading Book and in the Trading Book from Credit Risk (for example on loans and advances) Counterparty Risk (for example, on unsettled trades and on Derivative contracts) and from Issuer risk (for example, on holdings of equities and bonds).
              2. Some Derivatives contracts may result in an Authorised Firm being exposed to an Issuer as well as the Derivatives Counterparty. For example, a Derivative referenced on a Security may result in an Exposure to the Counterparty, to the transaction and to the Issuer of the underlying Security.
              3. Examples of an Exposure are actual or potential claims on a Counterparty including contingent liabilities arising in the normal course of an Authorised Firm's business.
              4. PIB App4 includes further Rules and Guidance on:
              a. fully and partially exempt Exposures, Exposures to undisclosed Counterparties, parental guarantees and capital maintenance agreements;
              b. identification of Exposures;
              c. identification of Closely Related and Connected Counterparties, and exemptions for Connected Counterparties;
              d. measuring Exposures to Counterparties and Issuers in relation to Derivatives, equity indices, and other items; and
              e. country risk Exposure.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exclusions from the Large Exposure Limits

          • PIB 4.15.8

            (1) For the purposes of this section, Exposure excludes:
            (a) claims and other assets required to be deducted for the purposes of calculating an Authorised Firm's Tier 1 Capital;
            (b) a transaction entered into by an Authorised Firm as depository or as agent that does not create any legal liability on the part of the Authorised Firm;
            (c) claims resulting from foreign exchange transactions where an Authorised Firm has paid its side of the transaction and the countervalue remains unsettled during the 2 business days following the due payment or due delivery date. After 2 business days the claim becomes an Exposure;
            (d) claims arising as a result of money transmission, payment services, clearing and settlement, correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed receipts in funding and other Exposures arising from client activity which do not last longer than the following business day;
            (e) in the case of the services outlined in (d) intra-day Exposures to Financial Institutions who provide these services are excluded;
            (f) claims resulting from the purchase and sale of Securities during settlement where both the Authorised Firm and the Counterparty are up to five business days overdue in settling. The five business days include the due payment or due delivery date. After five business days, the claim becomes an Exposure; and
            (g) Exposures that are guaranteed by the Authorised Firms Parent in accordance with PIB Rule 4.15.18.
            (2) For the purposes of this section, Exposure to a CCP which carry a 0% CCR in accordance with PIB section 4.8 are excluded.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

        • PIB 4.15.9

          An Authorised Firm need not include fully exempt Exposures, as referred to in PIB Rule A4.11.1 when monitoring compliance with the limits in Rules PIB 4.15.5, PIB 4.15.6 and PIB 4.15.7.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Institutional Exemption

          • PIB 4.15.10 PIB 4.15.10

            (1) This Rule applies to an Authorised Firm in Category 2 and 3A.

            (2) For Exposures to a Financial Institution, or a group of Connected Counterparties one of which is a Financial Institution, the total amount of an Authorised Firm's Exposures may exceed 25% of its Tier 1 Capital, provided those institutions are Investment Grade (Credit Quality Grades 1 to 3) and subject to the following:

            (a) Exposures to any entities within the group of Connected Counterparties that are not Financial Institutions are limited to 25% of Tier 1 Capital after taking account of Credit Risk mitigation;
            (b) the Exposures must not form part of the Tier 1 Capital of the Counterparty;
            (c) the Counterparty Risk profile must be subject to review on at least an annual basis; and
            (d) Exposures of this nature must not in any case exceed a maximum of US$ 100 million or 100% of Tier 1 Capital, whichever is the lower.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

            • PIB 4.15.10 Guidance

              The DFSA will, in exceptional circumstances, consider an application to waive or modify the limits set out above. In such circumstances the Authorised Firm will have to make a submission to the DFSA as to why its specific circumstances would warrant a relaxation of the limits specified in (d) above.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Systems and Controls

          • PIB 4.15.11 PIB 4.15.11

            (1) An Authorised Firm must implement and maintain systems and controls to identify its Exposures and effectively manage Concentration Risks as a result of its activities.
            (2) Such systems and controls in place must be proportionate to the nature, scale and complexity of the Authorised Firm and must include written policies and procedures to address Concentration Risks, both on and off balance sheet, which:
            (a) are approved by the Governing Body on at least an annual basis; and
            (b) include internal approval limits for Exposures as well as limits for the risks associated with specific sectors, geographic location and single economic risk factors.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.11 Guidance

              The DFSA expects the systems and controls to include:

              a. processes for the tiered approval of Exposures based on size, risk profile and complexity;
              b. mechanisms for identifying, recording and monitoring all Exposures with particular focus on Large Exposures;
              c. mechanisms in place for the monitoring and control of Exposures to Counterparties and Groups of Connected Counterparties;
              d. mechanisms for monitoring and recording Exposures within its Group;
              e. mechanisms to monitor Counterparties in the same economic sector and exposed to single economic risks;
              f. mechanisms to identify and control risks arising from single geographic jurisdictions; and
              g. mechanisms to identify risks arising from related activities or commodities.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Credit Risk Mitigations

          • PIB 4.15.12

            (1) For the purposes of this section, an Authorised Firm may reduce the value of its Exposures, at its discretion, by any one or more of the following:

            (a) the amount of any specific provision made, where the provision relates to the risk of a credit loss occurring on that Exposure and is not held as part of a general provision or reserve against its Credit Risks;
            (b) Netting its claims on and liabilities to a Counterparty, provided that the conditions in PIB section 4.13 of Credit Risk mitigation are met;
            (c) the amount of Collateral held against its Exposures, where that Collateral is of a type listed based on the FCSA and FCCA approaches and meeting the requirements under PIB section 4.13, provided that supervisory haircuts are used for valuing that Collateral under the FCCA;
            (d) the amount of any eligible guarantees as permitted under PIB section 4.13.9;
            (e) the value of a Credit Derivative, where the Credit Derivative is an instrument included in PIB Rule 4.13.11 and the transaction meets the conditions set out in that section; and
            (f) the effects of transactions transferring Credit Risks from the Authorised Firm to another party through securitisation, provided that the conditions in PIB section 4.14 are met.

            (2) Where Credit Risk mitigation is used against an Exposure, an Authorised Firm must reduce the value of the original Exposure and recognise an equal Exposure to the Credit Risk mitigation provider, except where:

            (a) a credit default swap is used; and
            (b) neither the reference entity, nor the credit default swap provider, is a Financial Institution,

            (3) For the purposes of Exposure shifting under (2), the amount subject to shifting is:

            (a) the value of the protected portion for an unfunded credit protection;
            (b) where the FCSA is used, the market value of the collateral; and
            (c) where the FCCA is used, the market value of the collateral adjusted by applying the standard supervisory haircuts to the FCCA.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Added] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB 4.15.13

            An Authorised Firm intending to utilise any of the provisions contained in PIB section 4.13 (Credit Risk mitigation) for the purposes of reducing Exposure values should have in place policies and procedures addressing the following:

            (a) risks arising from maturity mismatches between Exposures and any credit protection on those Exposures;
            (b) the Concentration Risk arising from the application of Credit Risk mitigation techniques, including indirect Large Exposures — for example to a single Issuer of Securities taken as Collateral; and
            (c) the conduct of stress testing on Credit Risk mitigation taken as Collateral.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.14

            Where an Authorised Firm has availed itself of the reductions to Exposure values as set out in PIB A4.11 the Authorised Firm must calculate the Exposure as a percentage of its Tier 1 Capital on both a gross and net basis.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB 4.15.15

            An Authorised Firm that avails itself of the reduction in its Exposure value through the application of PIB Rule A4.11 must conduct periodic stress tests on its Exposures against the realisable value of any Collateral considered under with the FCSA or FCCA.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.16 PIB 4.15.16

            Where the value of the Collateral under the stress scenario is lower than the value applied under PIB Rule 4.15.12 the lower value should be used when determining the Exposure value for the purposes of this section.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.16 Guidance

              Such stress tests should include market value changes of underlying Collateral, risks relating to liquidity and realisation of such Collateral in stress scenarios. An assessment of the impact of any such changes on the Exposure value and the capital position of the Authorised Firm should be conducted. Stress testing of these positions should be conducted at least once a year.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.17 PIB 4.15.17

            An Authorised Firm must document its policy for the use of any of the exclusions in PIB Rule 4.15.12.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.17 Guidance

              Such policy should include risks such as maturity mismatches, stress testing of Collateral values, indirect Exposures arising from Credit Risk mitigation, such as mitigation provided on Exposures by the same Counterparty.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Treatment of Parental Guarantees

          • PIB 4.15.18

            An Authorised Firm may exclude an Exposure from the Concentration Risk limits set out in PIB Rules 4.15.5 to 4.15.7 where:

            (a) the Authorised Firm’s Parent guarantees that Exposure to a Counterparty or to a group of Closely Related Counterparties; and
            (b) the following conditions are met:
            (i) the Counterparty or group of Closely Related Counterparties are not Connected to the Authorised Firm;
            (ii) the guarantee is to be provided by the Authorised Firm’s Parent, or regulated member of its Group;
            (iii) the criteria for guarantees must be in line with the Credit Risk mitigation requirements as set out in PIB section 4.13;
            (iv) the entity providing the guarantee must be a bank regulated to standards acceptable to the DFSA;
            (v) the total amount of guarantees provided to the Authorised Firm must be less than 10% of the Parent (or other) Authorised Firm’s Tier 1 Capital;
            (vi) the Parent must be rated as a Credit Quality Grade of 1 or 2 by a recognised credit rating agency;
            (vii) the Authorised Firm must provide confirmation from the home state Financial Services Regulator that it is satisfied that the Parent Authorised Firm has sufficient resources to provide such guarantees and has no objection to the provision of such guarantees;
            (viii) the Authorised Firm should provide an annual confirmation that there are no changes to the enforceability of such guarantees; and
            (ix) the Authorised Firm must notify the DFSA when such guarantees represent 200%, 400% and 600% of Tier 1 Capital and the overall Large Exposure limit must not exceed 800%.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]