PIB 4 PIB 4 Credit Risk
PIB 4 Guidance1. PIB chapter 4 deals with the prudential requirements relating to the management of
Credit Riskby an Authorised Firm. Credit Riskrefers 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 Firmholds sufficient regulatory capital of acceptable quality so that it can absorb unexpected losses arising out of its Credit Riskexposures, should the need arise and that it continues to operate in a sustainable manner.3. This chapter requires an Authorised Firmto: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 Gradealigned with the likelihood of counterparty default;b. calculate the Credit Risk Capital Requirementfor its on-balance sheet assets and off-balance sheet exposures; andc. reduce the Credit Risk Capital Requirementfor its on-balance sheet assets and off-balance sheet exposures where the exposure is covered fully or partly by some form of eligible Credit Riskmitigant.4. PIB Appendix 4 provides detailed requirements, parameters, calculation methodologies and formulae in respect of the primary requirements outlined in PIB chapter 4.
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 Firmin Category1, 2, 3A or 5.
PIB 4.1.1 Guidance1. 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 CRCOMis a component in the calculation of the overall Risk Capital Requirementof an Authorised Firm, and that the CRCOMis to be calculated in accordance with this PIB chapter 4.3. The Rulesin PIB section 4.8 provide that the Authorised Firm's CRCOMis 8% of the Credit RWAof the firm, which in turn is calculated as the sum of:a. the RWAfor Credit Risk Exposures(CR Exposures); andb. the RWAfor 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 Rulesin this chapter, an Authorised Firminvesting in or holding Islamic Contractswhether or not for the purpose of a PSIAwill need to take account of the provisions under IFR RulesIFR 5.4.6 and IFR 5.4.7 to calculate the Credit Riskfor those Islamic Contracts.
PIB 4 Part 2 PIB 4 Part 2 — Credit Risk Systems and Controls
PIB 4.2 PIB 4.2 Application of this part
This part applies to an
Authorised Firmin Category1, 2, 3A or 5 with respect to both its Non-Trading Bookand Trading Booktransactions.
PIB 4.3 PIB 4.3 Credit Risk Management Systems
PIB 4.3.1 PIB 4.3.1
Authorised Firmmust implement and maintain comprehensive Credit Riskmanagement 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 Riskand to ensure that adequate Capital Resourcesare available to cover the risks assumed; and(c) ensure effective implementation of the Credit Riskstrategy and policy.
PIB 4.3.1 Guidance1.
Credit Riskis the risk that a borrower or Counterpartyfails to meet its obligations. It exists in both the Non-Trading Bookand the Trading Book, and both on and off the balance sheet of an Authorised Firm.2. Obviously, Credit Riskarises from loans but there are other sources of Credit Risksuch 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; andf. settlement of transactions.3. The objective of the Credit Riskmanagement system must be to ensure that every Authorised Firmholds adequate capital to cover Credit Riskand absorb any potential losses arising from that risk. Since Authorised Firmsneed to provide credit as part of their usual business, this needs to be achieved by effectively managing the Credit Riskassumed by the Authorised Firmas part of its credit business.4. Failure to manage Credit Riskeffectively could cause an Authorised Firmto 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; andc. 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 Firmsinvolved in the business of providing credit to design, implement and maintain comprehensive and effective systems to manage Credit Risk.
Credit Riskmanagement framework of an Authorised Firmmust have at least the following principal elements effectively implemented to ensure that the Credit Risk Exposuresof the Authorised Firmare of a sufficiently good quality:(a) an appropriate Credit Riskenvironment, defined by a documented Credit Riskstrategy and a documented Credit Riskpolicy;(b) application of the Credit Riskstrategy 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 Exposuresin relation to limits, and approvals of exceptions to limits;(e) adequate appropriately skilled human resources to manage the Credit Riskfunction;(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.
PIB 4.3.3 PIB 4.3.3(1) An
Authorised Firmmust ensure that its Governing Bodyretains responsibility for the Credit Riskmanagement 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 Firmmust 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 Riskmanagement function, in order to evaluate the suitability and effectiveness of such information in enabling them to provide effective oversight over the Credit Riskmanagement function.(3) An Authorised Firmmust ensure that its Governing Bodyregularly reviews and understands the implications as well as the limitations of Credit Riskmanagement information and reports presented to it, to ensure that the contents and the format of such reports are suitable for effective Governing Bodyoversight.(4) An Authorised Firmmust ensure that its Governing Bodyis responsible for carrying out regular stress testing on the credit portfolio which is appropriate for the nature, scale and complexity of the Credit Risksassumed by the Authorised Firm. An Authorised Firmmust ensure that its Governing Bodyannually reviews the stress scenarios and takes action to address any perceived issues arising from those reviews.(5) An Authorised Firmmust 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.
PIB 4.3.3 Guidance1. An
Authorised Firmmay structure its credit processes and Credit Riskmanagement function in a manner which suits its or its Group'sinternal organisational structure, culture and internal practices, provided the key functions and components relevant to Credit Riskmanagement, as mentioned above, are present, and there must be adequate segregation of functions responsible for critical Credit Riskmanagement 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 Firmfinds 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'ssenior management or an appropriately delegated body (such as a credit committee) should be responsible for effectively implementing the Credit Riskstrategy and policy approved by the Governing Bodyof the Authorised Firm. Senior management or such a credit committee will need to establish adequate procedures to identify, quantify, monitor and control the Credit Riskinherent in the Authorised Firm'sactivities 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 Riskmeasurement, an Authorised Firmshould take into account the realistic recoveries available from security or Collateralunder stressed market and macro-economic conditions.5. PIB Rule 4.3.3 (3) requires the Governing Bodyof an Authorised Firmto 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 Bodyto effectively discharge their responsibilities towards effective oversight of the firm and its credit risk management.
PIB 4.3.4 PIB 4.3.4
Authorised Firmmust also consider whether it is prudent to set out specific provisioning requirements for country and transfer risks to which it is exposed.
PIB 4.3.5 PIB 4.3.5
Authorised Firmavails itself of Credit Riskmitigations, the Authorised Firmmust have mechanisms in place to regularly assess the net realisable value of such mitigations taking into account prevailing market conditions.
PIB 4.3.5 Guidance1. PIB section 4.13 sets out the principles and methodologies for the recognition of
Credit Riskmitigation in the calculation of Credit RWA.2. Further Guidanceon Credit Risksystems and controls (including Credit Riskmitigation), and on the specific areas which the Credit Riskpolicy should cover, is set out in PIB section A4.1.
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 Firmmust implement and maintain a Credit Riskstrategy, which prescribes its stated degree of risk tolerance, level of capital available for credit activities, business strategy for credit activities and Credit Riskmanagement approach.(2) The strategy must be:(a) documented;(b) approved by the Governing Body; and(c) regularly reviewed and updated by the Authorised Firmat periodic intervals and at least annually, as appropriate to the nature, scale and complexity of its activities.
PIB 4.4.1 Guidance1. An
Authorised Firm's Credit Riskstrategy should reflect the aim to achieve sound credit quality while ensuring profit and business growth. Therefore the Credit Riskstrategy should address the Authorised Firm'sapproach 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 Riskstrategy 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.
Credit Risk Policy
PIB 4.4.2(1) An
Authorised Firmmust implement and maintain a Credit Riskpolicy which prescribes all the essential elements of the Credit Riskmanagement 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 Firmat 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 Resourcesposition as well the firm's nature, scale and complexity of its activities.(3) Any changes to the Credit Riskpolicy and how exceptions to the policy will be dealt with must be approved by the Governing Bodyor an appropriately delegated committee of senior management (such as a credit committee).(4) An Authorised Firmwith one or more branches outside the DIFCmust implement and maintain Credit Riskpolicies adapted to each local market and its regulatory conditions.
Credit Riskpolicy must:(a) be consistent with the approved Credit Riskstrategy, 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 Risknorms and criteria for approval of credit applications;(c) clearly specify the Exposurelimits, product types, business segments, nature of target borrowers and the nature of Credit Riskthat the Authorised Firmwishes to incur;(d) set out, where appropriate, the amounts and terms and conditions under which Counterpartiesor 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 Exposuresas 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'sactivities or, at the least, with the asset grading system prescribed in PIB Rule 4.5.4;(h) include comprehensive policies for reporting Exposureson an on-going basis;(i) include comprehensive policies for identifying and managing problem assets;(j) include a provisioning policy approved by the Governing Bodywhich 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 Bodyretains responsibility for the governance of such limits;(l) require that major Credit Risk Exposuresexceeding a specified amount or at a minimum all Large Exposuresof the Authorised Firmare approved by the Authorised Firm'ssenior management or its designated body like credit committee; and(m) require that all Credit Risk Exposuresthat are especially risky or inconsistent with the approved credit strategy of the Authorised Firmare approved by the Authorised Firm'ssenior management or its designated body such as a credit committee.
In relation to conflicts of interest and
Related Persontransactions, 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 Persondirectly 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 Exposuresto Related Personson terms that are more favourable than those available to Personswho are not Related Persons; and(c) if Exposuresto Related Personsare allowed on terms which are no more favourable than those available to Personswho 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 Bodyor the Governing Body'sdelegate; and(ii) exclude Personsdirectly or indirectly benefiting from the grant or write off of such Exposuresbeing part of the approval process.
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 Personunder 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 Personswho are not Related Persons, provided the credit policy:(a) is an Employeecredit policy that is widely available to Employeesof the Authorised Firm;(b) is approved by the Authorised Firm's Governing Bodyor the Governing Body'sdelegate;(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 Bodyor the Governing Body'sdelegate 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.
PIB 4.4.5 Guidance1. The requirements in these
Rulesdo not prevent arrangements such as Employeeloan schemes that allow more favourable and flexible loan terms to Employeesof the Authorised Firmthan 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 Employeesconcerned are Directors, Partnersor senior managers.2. Generally, where an Authorised Firmhas an Employeeloan scheme under these Rules, the DFSAexpects its Governing Bodyto 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 Employeesunder the scheme are adequate and effective in addressing the risks arising from such lending. The Authorised Firmshould also be able to demonstrate to the DFSAthat the procedures it has adopted relating to an Employeeloan scheme are adequate to address any risks arising from such lending. The DFSAexpects to have access to records relating to lending under an Employeeloan scheme upon request or during its supervisory visits. Any significant breach of or deviation from the procedures adopted in relation to an Employeeloan scheme may also trigger the reporting requirements to the DFSAunder GEN Rule 11.10.7.
For the purposes of the
Rulesin this chapter, a Personis a " Related Person" of an Authorised Firmif the Person:(a) is, or was in the past 2 years:(i) a member of a Groupor Partnershipin which the Authorised Firmis or was also a member; or(ii) a Controllerof the Authorised Firmor a Close Relativeof such a Controller;(b) is, or was in the past 2 years, a Director, Partneror senior manager of the Authorised Firmor an entity referred to under (a)(i) or (ii), or a Close Relativeof such a Director, Partneror senior manager; or(c) is an entity in which a Director, Partneror senior manager of the Authorised Firmor an entity referred to in (a)(i) or (a)(ii), or a Close Relativeof such a Director, Partneror senior manager has a significant interest by:(i) holding 20% or more of the shares of that entity, or a Parentof 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 Partneris not a Related Personwhere that Personis a limited partner of a Limited Partnershipformed under the Limited PartnershipLaw of 2006 or any similar limited partnership constituted under the law of a country or territory outside the DIFC.
Credit Procedures Manual
Authorised Firmmust 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.
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 Exposuresas 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'sactivities;(e) comprehensive processes for reporting Exposureson an ongoing basis; and(f) comprehensive processes for identifying problem assets, managing problem assets, monitoring their collections and for estimating required level of provisions.
PIB 4.4.8 Guidance
The same criteria should be applied to both advised and unadvised facilities and should deal with all
Credit Risksassociated with the Authorised Firm'sbusiness whether in the Non-Trading or Trading Bookor on or off balance sheet.
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 Firmmust:(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 Firmof a significant reduction in the credit quality and associated reduction on credit ratings from credit rating agencies for its credit portfolio.(2) An Authorised Firmmust 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.
PIB 4.5.1 Guidance
Authorised Firmshould closely monitor the adequacy of the internal credit assessment processes, in order to assess whether there is an upward bias in internal ratings.
Authorised Firmmust 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 Riskmitigants employed by the Authorised Firmare up-to-date, including periodic assessment of Credit Riskmitigants 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 Riskof off-balance sheet products such as Derivativesin 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.
PIB 4.5.3 PIB 4.5.3
Credit Riskmanagement 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 Exposuresof the Authorised Firm.
PIB 4.5.3 Guidance
Authorised Firmshould ensure that its loan portfolio is properly classified and has an effective early-warning system for problem loans.
PIB 4.5.4 PIB 4.5.4(1) An
Authorised Firmmust 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 Firmmust 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 Firmmay also have in place a more detailed credit grading system provided it can address the categories detailed in (2).
PIB 4.5.4 Guidance1. With respect to the ratings above,
Authorised Firmsshould consider Exposuresas 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 Firmsshould 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.
Authorised Firmmust 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.
Authorised Firmmust ensure that each and every credit which qualifies as a Large Exposureand is classified as an impaired credit is managed individually. This includes valuation, classification and provisioning for such credits on an individual item basis.
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.
Authorised Firm'sprovisioning 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.
Authorised Firmmust, 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.
PIB 4 Part 3 PIB 4 Part 3 — CRDOM
PIB 4.6 PIB 4.6 Application
PIB 4.6 Guidance1. As indicated in PIB Rule 4.1.1, this PIB chapter 4 (including this part 3) applies to
Authorised Firmsin Categories1, 2, 3A and 5. However, the provisions in this part are applied in a differentiated manner in that Category3A firms must, and Category2 firms may, use the Simplified Approachunder 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 Requirementof an Authorised Firm, as provided in Rules PIB 3.8.2 and PIB 3.8.3. The Rulesin this PIB 4 part 3, supplemented by PIB App4, govern the manner of calculation of the CRCOM.
PIB 4.7 PIB 4.7 Simplified Approach
Category 3A Firms
PIB 4.7.1 PIB 4.7.1(1) This
Ruleapplies only to an Authorised Firmin Category3A.(2) Subject to (3) and (4), an Authorised Firmmust apply the Simplified Approachas prescribed in PIB section A4.12 in PIB App4.(3) An Authorised Firmis not required to apply the Simplified Approachif it obtains prior approval of the DFSAnot to do so.(4) After obtaining approval under (3), a firm must not revert to the Simplified Approachwithout further prior approval from the DFSA.
PIB 4.7.1 Guidance1. In effect, the
Simplified Approachreduces undue regulatory burden on Category3A firms to reflect more appropriately their risk profile.2. In relation to (3) and (4), the DFSAmay 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 DFSAsolid 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 DFSAmay consider whether or not there has been a material change in the business of the firm.
Category 2 Firms
PIB 4.7.2 PIB 4.7.2(1) This
Ruleapplies only to an Authorised Firmin Category2.(2) Subject to (3) and (4), an Authorised Firmmay 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 Approachwithout further prior approval from the DFSA.(4) The DFSAmay revoke its approval under (2) and require a firm to disapply the Simplified Approach, where the DFSAconsiders that this is warranted by the firm's business model and risk profile.
PIB 4.7.2 Guidance
In relation to (3) and (4), the
DFSAmay 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 DFSAsolid 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 DFSAmay consider whether or not there has been a material change in the business of the firm.
PIB 4.8 PIB 4.8 Calculation of the Crcom
PIB 4.8.1(1) The
Credit Risk Capital Requirementis calculated as follows: CRCOM= 8% x Credit RWA(2) The Credit RWAof an Authorised Firmis 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 RWAfor 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
Calculation of RWA for Credit Risk Exposures (CR Exposures)
Authorised Firmmust include in its calculation of RWAfor CR Exposures:(a) any on-balance sheet asset; and(b) any off-balance sheet item;
but excluding:(c) any SE
Exposure;(d) any securitised Exposurethat meets the requirements for the recognition of risk transference in a Traditional Securitisationset out in PIB section 4.14; or(e) any Exposureclassified as a position or instrument in the Trading Bookin accordance with PIB section A2.1.
To calculate its
RWAfor CR Exposures, an Authorised Firmmust:(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 Exposuremeasurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit Riskmitigation;(b) categorise that Exposurein accordance with the Rulesin PIB section 4.10;(c) allocate an applicable Credit Quality Gradeand risk weight for that Exposurein accordance with the Rulesin section PIB 4.11 and PIB 4.12;(d) calculate the RWAamount for that Exposureusing the following formula:
RWA(CR) = E x CRWwhere:(i) "RWA(CR)" refers to the risk-weighted
Exposureamount for that CR Exposure;(ii) "E" refers to the Exposurevalue or amount, for that CR Exposure; and(iii) "CRW" refers to the applicable risk weight for that CR Exposuredetermined in accordance with (b) and (c); and(e) add the RWAamounts calculated in accordance with (d) for all its CR Exposures.
Calculation of RWA for Securitisation Exposures (SE Exposures)
To calculate its
RWAfor all its SE Exposures, an Authorised Firmmust:(a) calculate the value of the Exposurefor each of its SE Exposuresin accordance with Exposuremeasurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit Riskmitigation;(b) allocate an applicable Credit Quality Gradefor that SE Exposurein accordance with the Rulesin PIB section 4.11;(c) calculate the RWAamount for each SE Exposure, except for those SE Exposureswhich the Authorised Firmis required to include as deductions from any component of Capital Resources, using the following formula:
RWA(SE) = SE x CRWwhere:(i) "RWA(SE)" refers to the risk-weighted
Exposureamount for that securitisation Exposure;(ii) "SE" refers to the Exposurevalue or amount for that SE Exposurecalculated in accordance with (a); and(iii) "CRW" refers to the applicable risk weight for that SE Exposuredetermined in accordance with (b); and(d) add the RWAamounts calculated in accordance with (c) for all its SE Exposuresto the RWAamounts calculated in accordance with PIB Rule 4.8.5 in respect of its Early Amortisation Exposures.
To calculate its
RWAfor Early Amortisation Exposures, an Authorised Firmmust:(a) calculate the value of the Exposure(EAE) for each of its Early Amortisation Exposuresin accordance with Exposuremeasurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit Riskmitigation;(b) calculate the risk-weighted Exposureamount for each Early Amortisation Exposureusing the following formula:
RWA(EAE) = EAE x CRWwhere:(i) "RWA(EAE)" refers to the risk-weighted
Exposureamount for that Early Amortisation Exposure;(ii) "EAE" refers to the Exposurevalue or amount, for that Early Amortisation Exposurecalculated in accordance with (a); and(iii) "CRW" refers to the applicable risk weight for the underlying Exposuretype as if the Exposurehad not been securitised; and(c) add the RWAamounts calculated in accordance with (b) for all its Early Amortisation Exposures.
RWAamount for all of the SE Exposuresof an Authorised Firmto a securitisation and Exposuresarising from Credit Riskmitigation applied to those SE Exposuresmust not exceed the aggregate RWAamount corresponding to the underlying Exposuresof the securitisation had they been on the balance sheet of the Authorised Firmand included in the calculation of the Credit RWAof the Authorised Firm. For avoidance of doubt, the aggregate RWAamount must not include any deduction for a gain-on-sale or a Credit-Enhancing Interest-Only Striparising from the securitisation.
PIB 4.9 PIB 4.9 Methodology for Measurement of Exposures
PIB 4.9.1 PIB 4.9.1
Authorised Firmmust apply the Exposuremeasurement methodology set out in the Rulesin this part to calculate the value or amount of an Exposurefor any CR Exposureor SE Exposure.
PIB 4.9.1 Guidance1. The measurement methodology in this section prescribes the manner of calculation of
Exposuresfor the purpose of determining the Credit RWAfor Credit Risk(CR) Exposuresas provided in PIB Rule 4.8.3 and for securitisation (SE) Exposuresas provided in PIB Rule 184.108.40.206. Due regard should be given to the Guidancerelating to prudent valuation in PIB section 2.4 and related provisions in PIB A2.5.3. An Authorised Firmshould consult with the DFSAon the appropriate treatment to apply in the measurement of E, for transactions that have not been addressed in this part.
Authorised Firmmust calculate E for any CR Exposureor SE Exposure, net of any individual impairment provision attributable to such Exposures, as determined in accordance with the International Financial Reporting Standards.
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.
PIB 4.9.3 Guidance1. 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; andb. 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 Firmis 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 Firmat lease inception), the Authorised Firmshould calculate (i) an Exposureto the lessee equivalent to the discounted lease payment stream; and (ii) an Exposureto 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 Exposureto which it accrues.
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 Exposurearising from an OTC Derivativetransaction, long settlement transaction or securities financing transaction (referred to in PIBas an "SFT"), an Authorised Firmmust 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
PIB 4.9.4 Guidance1. An
Authorised Firmwhich is exposed to the risk of the underlying Securitiesin an OTC Derivativetransaction, 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; andb. E associated with investors' undrawn balances related to the SE Exposures. E is determined by allocating the undrawn balances of securitised Exposureson a pro-rata basis based on the proportions of the Originator'sand investor shares of the securitised drawn balances.3. For avoidance of doubt, where an Authorised Firmhas 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 Firmis 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 Firmhas 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 Firmis 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 Firmmust 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 Exposureto which it accrues.
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 Firmwhich has taken eligible financial Collateralfor any transaction other than an equity Exposure, an SE Exposure, an OTC Derivativetransaction, long settlement transaction or SFT may recognise the effect of such Collateralin accordance with Rules PIB 4.9.6 and PIB 4.9.7.(2) An Authorised Firmmust 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 CollateralComprehensive Approach (FCCA) which adopts the treatment under PIB Rule 4.13.6;to recognise the effect of eligible financial Collateral.(3) An Authorised Firmmust apply the chosen approach consistently to its entire Non-Trading Bookand must not use a combination of both approaches.
Authorised Firmusing the FCSA may recognise the effect of eligible financial Collateralin accordance with the Rulesin PIB section 4.13.
Authorised Firmusing the FCCA may calculate the CR Exposureadjusted for eligible financial Collateral(referred to in PIBas "E*"), in accordance with Rulesin PIB section A4.3 of PIB App4 and substitute E* for E when calculating the Credit Risk-weighted Exposureamount for that CR Exposureunder PIB section 4.8.
Recognition of Eligible Financial Collateral for Securitisation (SE) Exposures
Authorised Firmcalculating RWAsfor SE Exposuresmust use either the FCSA or the FCCA approaches to recognise the effect of eligible financial Collateral. An Authorised Firmmust apply the chosen approach consistently to the entire Non-Trading Bookand must not use a combination of both approaches.
Measurement of E for Counterparty Exposures
Measurement of E for Counterparty Exposures Arising from OTC Derivative Transactions and Long Settlement Transactions
For each OTC
Derivativetransaction or long settlement transaction which is not covered by a qualifying cross-product Nettingagreement, an Authorised Firmshould calculate E for the pre-settlement Counterparty Exposurearising from that OTC Derivativetransaction or long settlement transaction using the method set out in sections PIB A4.6 to PIB A4.8.
Measurement of E for Pre-Settlement Counterparty Exposures Arising from SFTs
An SFT must be treated as
Collateralisedlending, notwithstanding the wide range of structures which could be used for SFTs.
Authorised Firmmust calculate E, for a pre-settlement Counterparty Exposurearising from an SFT, other than an Exposurecovered by a qualifying cross-product Nettingagreement, in accordance with Rules PIB 4.9.15 to PIB 4.9.20.
Authorised Firmmust determine E, for a pre-settlement Counterparty Exposurearising from an SFT which is not covered by a qualifying cross-product Nettingagreement as follows:(a) in the case where the Authorised Firmhas lent Securitiesto a Counterpartyor sold Securitiesto a Counterpartywith a commitment to repurchase those Securitiesat a specified price on a specified future date, the latest fair value of the Securitieslent or sold; and(b) in the case where the Authorised Firmhas lent cash to a Counterpartythrough the borrowing of Securitiesfrom the Counterpartyor paid cash for the purchase of Securitiesfrom a Counterpartywith a commitment to resell those Securitiesat a specified price on a specified future date, the amount of cash lent or paid.
Authorised Firmwhich has taken eligible financial Collateralfor any SFT where the pre-settlement Counterparty Exposureis determined in accordance with PIB Rule 4.9.15 may recognise the effect of such Collateralin accordance with Rules PIB 4.9.17 to PIB 4.9.20.
Authorised Firmmust use either the FCSA or the FCCA to recognise the effect of eligible financial Collateralfor any SFT in the Non-Trading Book. The Authorised Firmmust apply the chosen approach consistently to the entire Non-Trading Bookand must not use a combination of both approaches. For a pre-settlement Counterparty Exposurearising from any SFT in the Trading Book, an Authorised Firmmust only use the FCCA to recognise the effect of eligible financial Collateral.
Authorised Firmwhich has taken eligible financial Collateralfor any SFT that is not covered by a qualifying bilateral Nettingagreement 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 Exposureamount for that CR Exposureunder PIB section 4.8.
Authorised Firmwhich has taken eligible financial Collateralfor an SFT that is covered by a qualifying bilateral Nettingagreement and using the FCCA, must calculate E* for all its CR Exposuresto any single Counterpartycovered by the qualifying bilateral Nettingagreement, in accordance with Rules PIB A4.3.2 to PIB A4.3.6 in PIB App4 (if the Authorised Firmis using supervisory haircuts or own-estimate haircuts), and substitute E* for E when calculating the Credit Risk-weighted Exposureamount for its CR Exposuresto that Counterpartyunder PIB section 4.8.
Exceptions to the Measurement of E
PIB 4.9.21 PIB 4.9.21
Authorised Firmmay attribute a value of zero to E for:(a) any pre-settlement Counterparty Exposurearising from any Derivativetransaction or SFT outstanding with a CCPe and which has not been rejected by that CCP, provided that the Exposureis fully Collateralisedon a daily basis;(b) any Credit Risk Exposurearising from any Derivativetransaction, SFT or spot transaction which an Authorised Firmhas outstanding with a CCP for which the latter acts as a custodian on the Authorised Firm'sbehalf, provided that the Exposureis fully Collateralisedon a daily basis;(c) any pre-settlement Counterparty Exposurearising from any Credit Derivativewhich an Authorised Firmmay recognise as eligible credit protection for a Non-Trading Book Exposureor another CCR Exposure; and(d) any pre-settlement Counterparty Exposurearising 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.
PIB 4.9.21 Guidance
Credit Risk(CR) Exposuresoutstanding with a CCP would, for example, include credit Exposuresarising from monies placed and from Collateralposted, with the Counterparty.
PIB 4.10 PIB 4.10 Categorisation of Credit Risk Exposures (CR Exposures)
PIB 4.10 Guidance
This section categorises
Exposuresfor the purpose of determining the CRW for CR Exposures, as provided in PIB Rule 4.8.3.
PIB 4.10.1 PIB 4.10.1
Authorised Firmmust categorise any CR Exposurethat 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 Firmor 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 Bankasset class, which consists of any CR Exposureto a central government or Central Bank;(c) the PSE asset class, which consists of any CR Exposureto a PSE;(d) the MDB asset class, which consists of any CR Exposureto an MDB;(e) bank asset class, which consists of any CR Exposureto a banking institution;(f) corporate asset class, which consists of any CR Exposureto any corporation, partnership, sole proprietorship or trustee in respect of a trust, other than Exposurescategorised in sub-paragraphs (a) to (e), (g) and (h);(g) regulatory retail asset class, which consists of any CR Exposuremeeting all of the following conditions:(i) the Exposureis to an individual, a group of individuals, or a small business;(ii) the Exposuretakes 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 DFSAmay specify from time to time;(iii) the Exposureis one of a sufficient number of Exposureswith similar characteristics such that the risks associated with such lending are reduced; and(iv) the total Exposureto any obligor or group of obligors is not more than $2 million;(h) residential mortgage asset class, which consists of any CR Exposuremeeting all of the following conditions:(i) the Exposureis to an individual or a group of individuals, or if the Exposureis to an entity other than an individual, the Authorised Firmcan demonstrate to the DFSA(if required to do so) that it has robust processes to ascertain that the Exposureis structured to replicate the risk profile of an Exposureto 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 Exposureis 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 Exposureis not classified as an impaired asset in accordance with Rulesin this module; and(iv) the Exposureis 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 Exposuremeeting all of the following conditions:(i) the Exposureis to a corporation, partnership, sole proprietorship or trustee in respect of a trust; and(ii) the Exposureis secured by commercial real estate; or(j) other Exposuresasset class, which consists of any CR Exposurewhich does not fall within any of the categories in sub-paragraphs (a) to (i).
PIB 4.10.1 Guidance
Exposureslisted under item (f) include transactions settled on a payment-versus-payment basis. For avoidance of doubt, the DFSAexpects that a CR Exposureto a securities firm should be categorised within the corporate asset class.
PIB 4.11 PIB 4.11 Credit Quality Grade and External Credit Assessments
PIB 4.11 Guidance
This section governs credit assessments of
Exposuresfor the purpose of determining the CRW for Credit Risk(CR) Exposuresas provided in PIB Rule 4.8.3 and for securitisation (SE) Exposuresas provided in PIB Rule 4.8.4.
Authorised Firmmust assign a CR Exposureto a Credit Quality Gradebased on the external credit assessment that is applicable to the CR Exposurein accordance with tables mapping the ratings from an ECAIto Credit Quality Grades, which will be published by the DFSA.
Authorised Firmmust only use an external credit assessment which is accessible to the public. An Authorised Firmmay not use a credit assessment that is made available only to the parties to a transaction.
Authorised Firmmust only use external credit assessments by a recognised ECAI. The DFSAmay impose conditions on the use of such external credit assessments.
PIB 4.11.4 PIB 4.11.4
Authorised Firmmust 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 Firmhas two external credit assessments which map into different Credit Quality Grades, it must assign the CR Exposureto the Credit Quality Gradeassociated with the higher risk weight. Where an Authorised Firmhas three or more external credit assessments which map into two or more different Credit Quality Grades, it must assign the CR Exposureto the Credit Quality Gradeassociated with the higher of the two lowest risk weights.
PIB 4.11.4 Guidance
For illustration, if there are three external credit assessments mapping into
Credit Quality Gradeswith risk weights of 0%, 20% and 50%, then the applicable risk weight is 20%. If the external credit assessments map into Credit Quality Gradeswith risk weights of 20%, 50% and 50%, then the applicable risk weight is 50%.
Authorised Firmmust not recognise the effects of Credit Riskmitigation if such mitigation is al reflected in the issue-specific external credit assessment of the CR Exposure.
CR Exposurehas an issue-specific external credit assessment from a recognised ECAI, an Authorised Firmmust use such assessment. Where a CR Exposuredoes not have an issue-specific external credit assessment, an Authorised Firmmust:(a) if there is an issue-specific external credit assessment for another Exposureto the same obligor, use the issue-specific assessment for the other Exposureonly if the Exposurewithout an issue-specific assessment ranks pari passu with or is senior to the Exposurewith the issue-specific assessment;(b) if the obligor has an Issuerexternal credit assessment, use the Issuerassessment of the obligor only if the Exposurewithout 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 Exposureand the risk weight associated with the external credit assessment, if any, of the obligor or another Exposureto the same obligor.
CR Exposureis risk-weighted in accordance with PIB Rule 4.11.6(a) or (b), an Authorised Firmmay use a domestic currency external credit assessment only if the CR Exposureis denominated in that domestic currency.
Authorised Firmmay use an external credit assessment to risk weight a CR Exposureonly if the external credit assessment has taken into account and reflects the entire amount of Credit Risk Exposurethe Authorised Firmhas with regard to all payments owed to it.
Authorised Firmmust not use unsolicited external credit assessments to assign any CR Exposureto 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 DFSAupon request; and(b) it uses unsolicited external credit assessments consistently for each type of Exposures, for both risk weighting and risk management purposes.
PIB 4.12 PIB 4.12 Risk Weights
PIB 4.12.1 PIB 4.12.1
Authorised Firmwith a CR Exposuremust:(a) for a CR Exposurethat 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 Exposurethat 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 Exposurearising from an Unsettled Transaction, determine the applicable risk weight in accordance with Rules PIB A4.6.5 to PIB A4.6.8.
Subject to PIB Rule 4.12.3, an
Authorised Firmmay apply a 0% risk weight to any CR Exposurecategorised as a cash item.
Authorised Firmmust 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.
Central Government and Central Bank Asset Class
Subject to PIB Rule 4.12.5, an
Authorised Firmmust risk-weight any CR Exposurein the central government and Central Bankasset class in accordance with the table below.
Risk weights for the central government and
Central Bankasset class Credit Quality Grade 1 2 3 4 5 6 Unrated Risk Weight 0% 20% 50% 100% 100% 150% 100%
Authorised Firmmay apply a 0% risk weight to any CR Exposureto 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 UAEwill be considered as though they were GCC member countries.
Public Sector Enterprises (PSE) Asset Class
PIB 4.12.6 PIB 4.12.6(1) Subject to PIB Rule 4.12.8, an
Authorised Firmmust risk-weight any CR Exposurein the PSE asset class in accordance with the following table:
Risk Weightsfor 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 UAEand GCC that exhibit Credit Riskscomparable 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.
Multilateral Development Bank (MDB) Asset Class
Risk Weightsfor the MDB asset class Credit Quality Grade 1 2 3 4 5 6 Unrated Risk Weight 0% 50% 50% 100% 100% 150% 50%
Authorised Firmmust apply a 0% risk weight to any CR Exposureto the qualifying MDBs set out below:(a) The World Bank Groupcomprised of the International Bankfor Reconstruction and Development (IBRD), the Multilateral InvestmentGuarantee Agency (MIGA), and the International Finance Corporation (IFC);(b) The Asian Development Bank(ADB);(c) The African Development Bank(AfDB);(d) The European Bankfor 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 Councilof Europe Development Bank(CEDB).
Authorised Firmmust apply a 0% risk weight to any CR Exposureto the Bankfor International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, or the European Stability Mechanism.
Bank Asset Class
PIB 4.12.10 PIB 4.12.10
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 Weightfor Short-Term Exposures 20% 20% 20% 50% 50% 150% 20%
PIB 4.12.10 Guidance
For the purposes of the above table, short-term
Exposuresrefer to Exposureswith an Original Maturityof three months or less and that are not expected to be rolled over.
Authorised Firmmust risk-weight any short-term CR Exposurein the bank asset class with an issue-specific external credit assessment in accordance with the following table.
CRWs for short-term
CR Exposuresin 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%
The CRW for any
CR Exposurein 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 Exposureto the central government of the jurisdiction in which the banking institution is incorporated or established, whichever is higher. If a short-term CR Exposurein the bank asset class with an issue-specific external credit assessment:(a) attracts a risk weight of 50% or 100%, then the Authorised Firmmust apply a risk weight of not lower than 100% to any unrated short-term CR Exposureto the same banking institution; or(b) attracts a risk weight of 150%, then the Authorised Firmmust apply a risk weight of 150% to any unrated CR Exposure(whether long-term or short-term) to the same banking institution.
Corporate Asset Class
Risk Weightsfor the corporate asset class Credit Quality Grade 1 2 3 4 5 6 Unrated Risk Weight 20% 50% 100% 100% 150% 150% 100%
Authorised Firmmust risk-weight any short-term CR Exposurein the corporate asset class with an issue-specific external credit assessment in accordance with the following table: Risk Weightsfor short-term CR Exposuresin 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%
The risk weight for any
CR Exposurein 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 Exposureto the central government of the jurisdiction in which the corporate is incorporated or established, whichever is higher. If a short-term CR Exposurein the corporate asset class with an issue-specific external credit assessment:(a) attracts a risk weight of 50% or 100%, then the Authorised Firmmust apply a risk weight of not lower than 100% to any unrated short-term CR Exposureto the same corporate; or(b) attracts a risk weight of 150%, then the Authorised Firmmust apply a risk weight of 150% to any unrated CR Exposure(whether long-term or short-term) to the same corporate.
Regulatory Retail Asset Class
Authorised Firmmust apply a 100% risk weight to any CR Exposurein the regulatory retail asset class.
Residential Mortgage Asset Class
Authorised Firmmust risk weight any CR Exposurein 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%
Commercial Real Estate Asset Class
Authorised Firmmust apply a 100% risk weight to any CR Exposurein the commercial real estate asset class.
Authorised Firmmust apply a risk weight of 150% to Exposures, including Exposuresin the form of Sharesor Unitsin a Collective Investment Fund, that are associated with particularly high risks.
For the purposes of PIB Rule 4.12.19,
Exposureswith 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 DFSAto constitute high risk for the purpose of this Rule.
When assessing whether an
Exposureother than Exposuresreferred to in PIB Rule 4.12.20 is associated with particularly high risks, an Authorised Firmmust 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 Exposurefalls under (a).
Other Exposures Asset Class
Authorised Firmmust apply a 100% risk weight to any CR Exposurein the other Exposuresasset class.
Investmentsin equity or regulatory capital instruments issued by banks or securities firms must be risk weighted at 100%, unless deducted from the capital base.
Past Due Exposures
Subject to Rules PIB 4.12.25 and PIB 4.12.26, an
Authorised Firmmust risk-weight the unsecured portion of any CR Exposurethat 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%
For the purposes of PIB Rule 4.12.24, an
Authorised Firmmust calculate the unsecured portion of any CR Exposurethat is past due for more than 90 days as follows:(a) for an Authorised Firmusing the FCSA:
Unsecured Portion = E – P – Cfwhere:(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
Collateralreceived; or(b) for an Authorised Firmusing the FCCA:
Unsecured Portion = E* – Pwhere —(i) E* = E* calculated in accordance with PIB section 4.9; and(ii) P = notional amount of eligible credit protection received.
Authorised Firmmust apply a 100% risk weight to any CR Exposurein the residential mortgage asset class that is past due for more than 90 days.
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 Riskmitigation in the calculation of Credit RWA.
PIB 4.13.1 PIB 4.13.1(1) An
Authorised Firmmust not recognise the effects of Credit Riskmitigation 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 Firmcomplies with the Rulesset out in this section, as applicable.(2) Where the calculation of Credit RWAal takes into account the Credit Riskmitigant, 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.
PIB 4.13.1 Guidance
Authorised Firmshould 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 Collateralagreement and the jurisdiction whose law governs the transaction subject to the credit protection or Collateralagreement. There should be sufficient written documentary evidence to adequately support the conclusion drawn and rebut any legal challenge. While an Authorised Firmmay 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 Firmshould ensure that an officer of the Authorised Firmwho 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.
Authorised Firmuses multiple Credit Riskmitigation for a single Exposure, the Authorised Firmmust divide the Exposureinto portions covered by each mitigation and must calculate the Credit Risk-weighted Exposureamount of each portion separately. An Authorised Firmmust apply the same approach when recognising eligible credit protection by a single protection provider where the eligible credit protection has differing maturities.
PIB 4.13.3 PIB 4.13.3(1) An
Authorised Firmmust take all appropriate steps to ensure the effectiveness of the Credit Riskmitigation arrangements it employs and to address related risks.(2) Where an Authorised Firmreduces or transfers Credit Riskby the use of Credit Riskmitigation, an Authorised Firmmust employ appropriate and effective policies and procedures to identify and control other risks which arise as a consequence of the transfer.
PIB 4.13.3 Guidance1. The use of techniques to reduce or transfer
Credit Riskmay simultaneously increase other risks (residual risks) which include legal, operational, liquidity and Market Risks. The DFSAexpects an Authorised Firmto 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; andg. management of Concentration Riskarising from the use of Credit Riskmitigation and the interaction of such risk with the overall Credit Riskprofile of the Authorised Firm.2. In order to fulfil the above, an Authorised Firmshould ensure a clearly articulated strategy for the use of Credit Riskmitigation as an intrinsic part of the general credit strategy of an Authorised Firm.3. Where an Exposureis subject to Credit Riskmitigation, credit managers should continue to assess the Exposureon 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. Collateralshould be revalued frequently, and the unsecured Exposureshould 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 Exposureunder 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 Counterpartywere to default and the Collateralhad to be liquidated. Furthermore, the setting of limits for collateralised Counterpartiesshould take account of the potential unsecured Exposure. Stress tests and scenario analysis should be conducted to enable the Authorised Firmto understand the behaviour of its portfolio of Credit Riskmitigation 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 Collateralmanagement, including:a. the terms of Collateralagreements;b. the types of Collateraland enforcement of Collateralterms (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); ande. the prompt resolution of disputes, such as valuation of Collateralor positions, acceptability of Collateral, fulfilment of legal obligations and the interpretation of contract terms.6. The policies and procedures referred to under Guidancenote 1(d) should be supported by Collateralmanagement systems capable of tracking the location and status of posted Collateral(including re-hypothecated Collateral), outstanding Collateralcalls and settlement problems.7. Where an Authorised Firmobtains credit protection that differs in maturity from the underlying credit Exposure, the Authorised Firmshould monitor and control its roll-off risks, i.e. the fact that the Authorised Firmwill 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 Collaterallarge quantities of instruments issued by one obligor creates Concentration Risk. An Authorised Firmshould have a clearly defined policy with respect to the amount of Concentration Riskit is prepared to run. Such a policy might, for example, include a cap on the amount of Collateralit would be prepared to take from a particular Issueror market. The Authorised Firmshould also take Collateraland purchased credit protection into account when assessing the potential concentrations in its overall credit profile.9. Notwithstanding the presence of Credit Riskmitigation considered for the purposes of calculating Credit RWAamounts, an Authorised Firmshould continue to undertake a full Credit Riskassessment of the underlying Exposure.
PIB 4.13.4(1) An
Authorised Firmmust be able to satisfy the DFSAthat it has systems in place to manage potential concentration of risk arising from its use of guarantees and Credit Derivatives.(2) An Authorised Firmmust be able to demonstrate how its strategy in respect of its use of Credit Riskmitigation techniques, and in particular use of Credit Derivativesand guarantees interacts with its management of its overall risk profile.
PIB 4.13.4 Guidance
In order to recognise the effects of
Credit Riskmitigation of the types of Collateralset out in Rules PIB 4.13.5 to PIB 4.13.7, an Authorised Firmmust ensure that the relevant requirements in PIB Rule 4.13.8 are complied with.
PIB 4.13.5 PIB 4.13.5(1) For an
Authorised Firmusing the FCSA, eligible financial Collateralcomprises:(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 Maturityof one year or less that has a short-term Credit Quality Gradeof 3 or better as set out in PIB section 4.12; or(d) any debt security issued by a bank that does not have an external credit assessment by a recognised ECAIif 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 Issuerwhich rank equally with the mentioned debt security have a long term or short term (as applicable) Credit Quality Gradeby a recognised ECAIof "3" or better;(iv) the Authorised Firmis not aware of information to suggest that the issue would justify a Credit Quality Gradeof below "3" as indicated in (iii) above; and(v) the Authorised Firmcan demonstrate to the DFSAthat the market liquidity of the debt security is sufficient to enable the Authorised Firmto dispose the debt security at market price.(e) any equity security (including convertible bonds) that is included in a main index; or(f) any Unitin a Collective Investment Fundwhere:(i) a price for the units is publicly quoted daily; and(ii) at least 90% of the deposited property of the Fundis invested in instruments listed in this Rule.(2) Cash-funded credit-linked notesissued by an Authorised Firmagainst Exposuresin the Non-Trading Bookwhich fulfil the criteria for eligible Credit Derivativesmust 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 Firmthat are held as Collateralat 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 Exposurecovered by such Collateralmust be the risk weight of the third-party bank.
PIB 4.13.5 Guidance1. For the purposes of Rule PIB 4.13.5 and PIB 4.13.6, eligible financial
Collateralexcludes any T1 Capital instrument or T2 Capital instrument issued by any entity in the Financial Groupof the Authorised Firm, which is held by the Authorised Firmor any of its Financial Groupentities as Collateral.2. For an Authorised Firmusing Unitsof a Fundunder the FCSA approach, the use or potential use by that Fundof Derivativeinstruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the Unitsin that Fundfrom being recognised as eligible financial Collateral.
Authorised Firmusing the FCCA, eligible financial Collateralcomprises:(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 Unitin a Collective Investment Fundwhich invests in equity securities referred to in (b), where:(i) a price for the Unitsis publicly quoted daily; and(ii) at least 90% of the deposited property of the Fundis invested in instruments listed in this Ruleand PIB Rule 4.13.5.
PIB 4.13.7 PIB 4.13.7
In the case of any
Counterparty Risk Exposuresin Rules PIB 4.13.5. and PIB 4.13.6 arising from an SFT which are included in the Trading Book, eligible financial Collateralincludes all instruments which an Authorised Firmmay include in its Trading Book.
PIB 4.13.7 Guidance
Authorised Firmusing Unitsof a Fundunder the FCSA approach, the use or potential use by that Fundof Derivativeinstruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the Unitsin that Fundfrom being recognised as eligible financial Collateral.
Requirements for Recognition of Collateral
Authorised Firmmust ensure that the following requirements are complied with before it recognises the effects of Credit Riskmitigation of any Collateral:(a) the legal mechanism by which Collateralis pledged, assigned or transferred must confer on the Authorised Firmthe 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 Firmhas taken all steps necessary to fulfil those requirements under the law applicable to the Authorised Firm'sinterest in the Collateralfor 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 Counterpartyand the value of the Collateraldo not have a material positive correlation;(d) securities issued by the Counterpartyor any Closely Related Counterpartyare not eligible;(e) the Authorised Firmhas implemented procedures for the timely liquidation of Collateralto ensure that any legal conditions required for declaring default of Counterpartyand liquidating the Collateralare observed, and that the Collateralcan be liquidated promptly; and(f) where the Collateralis held by a custodian, the Authorised Firmhas taken reasonable steps to ensure that the custodian segregates the Collateralfrom its own assets.
PIB 4.13.9 PIB 4.13.9(1) An
Authorised Firmmay recognise the effects of Credit Riskmitigation 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 Firmmust not recognise the effects of Credit Riskmitigation 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 Firmof 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 Firmis 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.
PIB 4.13.9 Guidance1. 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 Firmor the guarantor assuming the future payment obligations of the Counterpartycovered by the guarantee, as specified in the relevant documentation governing the guarantee.
In addition to the requirements in PIB Rule 4.13.9, where an
Authorised Firmhas an Exposurethat 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 Firmmay treat the Exposureas being protected by a direct guarantee from the central government or Central Bankin question, provided the following requirements are complied with:(a) the counter-guarantee covers all Credit Riskelements 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 Firmis able to satisfy the DFSAthat 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.
PIB 4.13.11(1) An
Authorised Firmmay recognise the effects of Credit Riskmitigation of a Credit Derivativeonly if it is provided by any of the following entities:(a) central government or Central Bank;(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 Firmmay recognise the effects of Credit Riskmitigation of only the following types of Credit Derivatives:(a) credit default swaps;(b) total return swaps;(c) credit linked noteswhich are cash funded; and(d) instruments that are composed of, or are similar in economic substance, to one or more of the Credit Derivativesin (a) to (c).
PIB 4.13.12 PIB 4.13.12
Authorised Firmmust not recognise the effects of Credit Riskmitigation of any Credit Derivativeunless all of the following requirements are complied with:(a) the terms and conditions of any credit protection obtained via a Credit Derivativemust be set out in writing by both the Authorised Firmand the provider of credit protection;(b) the Credit Derivativemust 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 Firmof 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 Derivativecontract;(e) the Credit Derivativecontract 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 Exposurethat 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 Exposureinvolving 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 Derivativemust not terminate prior to the maturity of the underlying Exposureor expiration of any grace period required for a default on the underlying Exposureto 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 Derivativethat 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 Firmto transfer the underlying Exposureto the credit protection provider is required for settlement, the terms of the underlying Exposuremust 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 Firmmust 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 Derivativecontract 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.
PIB 4.13.12 Guidance1. An
Authorised Firmshould not recognise the effects of Credit Riskmitigation 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 DFSAwould 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 Derivativecontract would include those requirements.3. The DFSAwould generally consider the cash settlement methodology provided in the ISDA Credit DerivativesDefinitions as satisfying the requirement for obtaining post-credit event valuations of the underlying obligation.
PIB 4.13.13(1) In the case where there is a currency mismatch between the credit protection and the underlying
Exposure, an Authorised Firmmust reduce the amount of the Exposuredeemed 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
Exposurebased on a ten-business day holding period, assuming daily mark-to-market.(2) An Authorised Firmmust determine HFX in the following manner:(a) if the Authorised Firmuses standard supervisory haircuts, HFX is 8%; and(3) If the credit protection is not marked-to-market daily, HFX must be scaled in accordance with PIB Rule A4.3.25.
Authorised Firmmay recognise the effects of Credit Riskmitigation for an Exposurewhere there is a maturity mismatch only if the Credit Riskmitigant has an Original Maturityof 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 Riskmitigant is less than that of the underlying Exposure.
PIB 4.13.15(1) An
Authorised Firmmust determine the maturity of the underlying Exposureand the maturity of the Credit Riskmitigant conservatively. The residual maturity of the underlying Exposuremust be gauged as the longest possible remaining time before the Counterpartyis scheduled to fulfil its obligation, taking into account any applicable grace period.(2) In the case of Credit Riskmitigant, 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 Firmbut the terms of the arrangement at origination of the Credit Derivativecontain a positive incentive for the Authorised Firmto call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.
PIB 4.13.16 PIB 4.13.16(1) An
Authorised Firmmust calculate the value of the Credit Riskmitigation 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.
Collateralamount, guarantee amount) adjusted for any haircuts;(b) t = min (T, residual maturity of the Credit Riskmitigant) expressed in years; and(c) T = min (5, residual maturity of the Exposure) expressed in years.(2) For residual maturity of the Exposurein the case of a basket of Exposureswith different maturities, an Authorised Firmmust use the longest maturity of any of the Exposuresas the maturity of all the Exposuresbeing hedged.
PIB 4.13.16 Guidance
The positive incentive for an
Authorised Firmto 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.
On-balance Sheet Netting
PIB 4.13.17(1) An
Authorised Firmmay recognise as eligible the Nettingof an on-balance sheet Exposureagainst an offsetting on-balance sheet item if the related Nettingagreement meets the condition in PIB Rule 4.13.19.(2) Eligibility for Nettingis limited to reciprocal cash balances between the Authorised Firmand its Counterparty. Only loans and deposits of the Authorised Firmmay be subject to a modification of their Credit RWAsas a result of an on-balance sheet Nettingagreement.
PIB 4.13.18(1) Assets (loans) and liabilities (deposits) subject to recognised on-balance sheet
Nettingare to be treated as cash Collateralusing the formula in PIB A4.3.6, under which an Authorised Firmmay use zero haircuts for Exposureand Collateral.(2) When a currency mismatch exists, an Authorised Firmmust apply the standard supervisory haircut of 8% for currency mismatch.(3) When a maturity mismatch exists between the off-setting items, an Authorised Firmmust apply the Rules PIB 4.13.14 to PIB 4.13.16 to address the maturity mismatch.(4) Netcredit Exposure, after taking into account recognised Netting, will be subject to the applicable CRW for the Counterparty.
PIB 4.13.19 PIB 4.13.19
Authorised Firmto recognise an on-balance sheet Nettingagreement 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 Firmand the same Counterparty;(b) the Authorised Firmnets 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 Firmand the Counterpartydoes not contain a Walkaway Clause;(e) the Nettingprovided for in the agreement between the Authorised Firmand the Counterpartyis effective and enforceable in the event of default, bankruptcy, liquidation or other similar circumstances affecting either the Counterpartyor 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 Exposureis 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.
PIB 4.13.19 Guidance1. An
Authorised Firmshould assess whether any qualifications, assumptions or reservations contained in the legal opinion cast doubt upon the enforceability of the Nettingagreement. If, as a result of the qualifications, assumptions or reservations, there is material doubt about the enforceability of the agreement, the Authorised Firmshould assume that the requirements for Nettinghave not been met.2. An Authorised Firmusing a standard form Nettingagreement 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 Nettingagreement 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 Nettingagreement, the Authorised Firmshould satisfy itself that the amended Nettingagreement 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 Firmmay 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.
PIB 4.14 PIB 4.14 Securitisation
This section applies to an
Authorised Firmwhich:(a) acts as an Originatorin a securitisation;(b) transfers Credit Riskon 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 Sponsorin a securitisation; or(d) provides Credit Enhancement, liquidity support, or Underwritingor dealing facilities relating to the items being transferred.
PIB 4.14.2 PIB 4.14.2
For the purposes of this chapter and PIB App4, "securitisation" includes Traditional
Securitisation, Synthetic Securitisationand Re-securitisation, as defined below:(a) A Traditional Securitisationis a structure where the cash flow from an underlying pool of Exposuresis 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 Securitisationwill generally assume the movement of assets off balance sheet.(b) A Synthetic Securitisationis a structure with at least two different stratified risk positions or tranches that reflect different degrees of Credit Riskwhere Credit Riskof an underlying pool of Exposuresis transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) Credit Derivativesor guarantees that serve to hedge the Credit Riskof the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool. A Synthetic Securitisationmay or may not involve the removal of assets off balance sheet.(c) A Re-securitisation Exposureis a securitisation Exposurein which the associated underlying pool of Exposuresis tranched and at least one of the underlying Exposuresis a securitisation Exposure. In addition, an Exposureto one or more Re-securitisation Exposuresis a Re-securitisation Exposure.
PIB 4.14.3 Guidance
DFSAwould 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 Securitieswhich are secured on the assets and serviced from the cashflows which they yield as "securitisation".
Systems and Controls for the Use of Securitisations
Authorised Firmmust 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, Originatoror 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 Risksthat may arise under a securitisation; and(c) reputational risks that may arise as a result of its securitisation activities.
Authorised Firmmust 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 Firmmust 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.
PIB 4.14.5 PIB 4.14.5
Authorised Firmmust 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 Riskmitigation or for liquidity purposes.
PIB 4.14.5 Guidance1. 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
Exposuresin stressed market conditions and the implications for other sources of risk. Such stress tests should include both existing securitisation Exposuresand 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'ssecuritisation volumes and its off-balance sheet Exposures.3. An Authorised Firmshould 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.
PIB 4.14.6 PIB 4.14.6
In order to qualify for using the
Rulesspecified in this section, and particularly the risk weighting approach outlined below, an Authorised Firmmust 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 Exposureto the transaction, such as waterfall triggers, Credit Enhancements, liquidity enhancements, market value triggers and deal specific definitions of default.
PIB 4.14.6 Guidance1. An
Authorised Firmwhich is an investor, Originatoror Sponsorof a Securitisationshould fully understand the risks it has assumed in order to ensure that it can accurately determine the Capital Requirementsfor the Exposuresarising from the securitisation in accordance with the Rulesin 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 Firmsshould have information relating to not only the underlying securitisation transactions but also the characteristics and performance of the underlying pools of such transactions.
PIB 4.14.7 PIB 4.14.7
Authorised Firmis either an Originatoror a Sponsorof a Traditional Securitisationor a Synthetic Securitisation:(a) the Authorised Firmintending to conduct the securitisation must notify the DFSAat least 30 days in advance of the proposed execution of the securitisation;(b) the Authorised Firmconducting the securitisation must calculate its Credit RWAsfor all resultant Exposuresfrom that securitisation, in accordance with PIB section 4.8, provided the requirements of this section are met; and(c) the Authorised Firmconducting the securitisation must produce documentation reflecting the execution and economic substance of the transaction.
PIB 4.14.7 Guidance
The notification made to the
DFSAunder (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 Riskmitigation applied and implications on the capital and liquidity position on the Authorised Firm.
Calculation of Credit RWA Arising from Securitisations
PIB 4.14.8 PIB 4.14.8
Authorised Firmmust calculate the Credit RWAamounts for Exposuresarising from securitisations according to the requirements in this section.
PIB 4.14.8 Guidance1. An
Authorised Firmshould apply the securitisation framework set out in this section for determining the regulatory Capital Requirementson Exposuresarising from traditional and Synthetic Securitisationsor similar structures that contain features common to both.2. This section sets out the requirements for Originators, Authorised Firmswhich transfer Credit Riskfrom their balance sheets and Sponsorsin a securitisation transaction involving Non-Trading Book Exposures. This section also sets out the methodologies for calculation of RWAamounts for securitisation Exposures. The Rulessetting out the methodologies for calculation of Market Risk Capital Requirementamounts for securitisation Exposuresheld in the Trading Bookare specified in PIB chapter 5 and PIB App5 of this module.3. As securitisations may be structured in many different ways, an Authorised Firmengaging 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.
Authorised Firmis required, subject to PIB Rule 4.14.12, to include all securitisation Exposuresin its calculation of Credit RWAsrelating to securitisations, including the following:(a) those arising from the provision of Credit Riskmitigants 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.
Authorised Firmmust include in its calculation of Credit RWAall of its securitisation Exposuresheld in the Non-Trading Book, except for those securitisation Exposureswhich the Authorised Firmis required to include as deductions from T1 Capital and deductions from T2 Capital.
Repurchased securitisation transactions must be treated as retained securitisation
PIB 4.14.12(1) An
Authorised Firmmay deduct SE Exposureswhich 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.
PIB 4.14.13 PIB 4.14.13
Authorised Firmmust 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.
PIB 4.14.13 Guidance
Gain-on-sale arises when there has been an increase in equity of the
Authorised Firmassociated with recognising the discounted value of the expected future margin income as part of the regulatory capital.
Authorised Firmmust assign a securitisation Exposureto a Credit Quality Gradebased on the external credit assessment (where available) that is applicable to the securitisation Exposurein accordance with relevant Rulesin this chapter.
Originatoror a Sponsorof 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;
Originatorfails to comply with PIB Rule 4.14.15 in respect of a securitisation, it:(a) must include all the underlying Exposuresof the securitisation in its calculation of Credit RWAsas if those Exposureshad 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 Firmhas provided non contractual support and the regulatory capital impact of doing so.
Requirements in Order for a Traditional Securitisation to be Excluded from the Calculation of RWA
PIB 4.14.17(1) An
Authorised Firmwhich is an Originatoror a Sponsorof a Traditional Securitisationmay exclude Securitised Exposuresfrom the calculation of Credit RWAamounts only if all of the conditions detailed in PIB Rule A4.10.1 have been complied with.(2) An Authorised Firmmeeting the requirements specified in PIB Rule A4.10.1 must hold regulatory capital against any securitisation Exposuresit retains.
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 Firmwhich is an Originatoror a Sponsorof a Synthetic Securitisationmay recognise the effects of Credit Riskmitigation of the Synthetic Securitisationin 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 Riskmitigation are obtained through eligible credit protection, eligible financial Collateralor both; and(c) Credit Riskis transferred to third parties.(2) In relation to (b), the Credit Riskmitigation techniques used must meet the requirements of PIB section 4.13.
PIB 4.14.18 Guidance
In relation to (1)(c) the transferor is deemed to have effective control over the transferred
Credit Risk Exposuresif 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.
PIB 4.14.19(1) An
Authorised Firmmeeting the conditions in PIB Rule 4.14.18 must still hold regulatory capital against any securitisation Exposuresit retains.(2) The Authorised Firmmay recognise the effects of Credit Riskmitigation of eligible financial Collateralpledged by any SPE, but it may not recognise any SPE which is an Issuerof securitisation Exposuresas an eligible protection provider.
Operational Requirements for Use of External Credit Assessments
The external credit assessment used for determining the applicable risk weight for a
CR Exposuremust be determined by taking into account the entire amount of Credit Risk(principal and interest) an Authorised Firmis exposed to.
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 Firmsmust apply external credit rating agency ratings consistently to all tranches of securitisations;(d) where an Exposurehas two ratings from external credit rating agencies the less favourable rating must be used; and(e) where an Exposurehas 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).
Credit Riskmitigation 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.
Authorised Firmmust treat any securitisation Exposureas an unrated Exposurewhere:(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 Firmitself (e.g. if an Authorised Firmbuys ABCP) where it provides an unfunded securitisation Exposureextended to the ABCP Programme, such as a liquidity facility or Credit Enhancement, and that Exposureplays a role in determining the credit assessment on the ABCP, the Authorised Firmmust treat the ABCPas if it were not rated and continue to hold capital against the other securitisation Exposuresit provides);(c) the Credit Riskmitigant 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 Riskmitigation does not meet the eligibility criteria for mitigation specified in PIB section 4.13.
Credit Riskmitigation is applied to a specific Exposurewithin a securitisation the Authorised Firmmust treat the Exposureas unrated, and then use the mitigation as set out in PIB section 4.13 should the Rulescontained in that section apply.
Authorised Firmmust 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 Firmitself.
The treatment outlined in PIB Rule 4.14.24 also applies to
Exposuresin the Authorised Firm's Trading Book. An Authorised Firm's Capital Requirementfor such Exposuresheld in the Trading Bookcan be no less than the amount required under the Non-Trading Book.
Calculation of RWA Amounts for Securitisation Exposures
PIB 4.14.27(1) In order to calculate the
RWAamount for a securitisation position, the relevant risk weight must be assigned to the Exposurevalue 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.
In cases where there are
Exposuresto different tranches in a securitisation, the Exposureto each tranche must be considered a separate securitisation position.
Exposurevalue 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.
Assigning Risk Weights
Authorised Firmmust assign a risk weight for any SE Exposurein accordance with the tables below, to calculate the Credit RWAamounts for that Exposure. Risk Weightsfor Long-Term securitisation Exposures Long Term rating category Credit Quality Grade 1 2 3 4 5 and above including unrated Risk Weightto 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 Weightsfor Short-Term securitisation Exposures Short-term rating category Credit Quality Grade I II III IV and above including unrated Risk Weightto be applied 20% 50% 100% 1000% or Deduction from Capital Resources Risk Weightapplied to Re-securitisation Exposures 40% 100% 225% 1000% or deduction from Capital Resources
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 Firmmay as an alternative to including the position in its calculation of Credit RWAamounts, deduct from its CET1 Capital the Exposurevalue of such positions.(2) For the purposes of this Rule, the calculation of the Exposurevalue may reflect eligible funded credit protection consistent with applicable Rulesin this chapter.
Authorised Firmthat is an Originatoror Sponsorof a securitisation, the Credit RWAamounts calculated for its securitisation positions may be limited to the RWAamounts which would be calculated for the SE Exposureshad 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.
[Not currently in use]
[Not currently in use]
Exceptions to Deduction of Unrated Securitisation Exposures
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
Exposurein a securitisation;(b) Exposuresthat are in a second loss position or better of an ABCPand meet the requirements of PIB Rule 4.14.41; and(c) eligible liquidity positions.
Most Senior Exposure in a Securitisation
PIB 4.14.37(1) Where an
Authorised Firmholds or guarantees unrated securitisation Exposurefrom the most senior tranche in a securitisation, the Authorised Firmmay apply the "look through" treatment, provided the composition of the underlying pool of Exposuressecuritised is known at all times and the Authorised Firmis able to determine the applicable risk weights for the underlying Exposures.(2) An Authorised Firmapplying the look-through treatment to an unrated securitisation Exposure, pursuant to (1), must apply to that securitisation Exposurethe weighted average of the risk weights of the underlying Exposuresdetermined in accordance with the Rulesin 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 Firmis unable to determine the risk weights for the underlying Exposuresin 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.
Authorised Firmwishing 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.
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.
Authorised Firmmust have systems and controls in place to monitor effectively the composition of Exposureswhere the look-through provision has been applied on an ongoing basis.
Exposures that are in a Second Loss Position or Better of an ABCP
Authorised Firmmay apply a risk weight of 100% or the highest risk weight assigned to any of the underlying Exposuresin the ABCP Programme, whichever is higher, to an unrated securitisation Exposurearising from the ABCP Programme, provided the securitisation position complies with the following conditions:(a) the subject securitisation Exposuremust be in a tranche which is economically in a second loss position or better and the First Loss Positionmust provide meaningful credit protection to the second loss tranche;(b) the associated Credit Riskof the securitisation Exposureis the equivalent of a Credit Quality Gradeof III or better in the short-term rating category; and(c) the Authorised Firmmust not hold a position in the First Loss Position.
Eligible Liquidity Positions
Authorised Firmproviding an unrated eligible liquidity facility may assign to the resulting securitisation Exposurethe highest risk weight that would be applied to any of the underlying Exposurescovered by the facility.
PIB 4.14.43(1) An off balance sheet SE
Exposurewill receive a 100% CCF unless:(a) the Exposurequalifies as an eligible liquidity facility, or(b) the Exposureis an eligible Servicercash advance facility.(2) In relation to (1), an eligible Servicercash advance facility is a facility provided to a securitisation in order to ensure uninterrupted flow of payments to investors. As long as the Serviceris 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.
PIB 4.14.44(1) For the purposes of PIB Rule 4.14.42, an
Authorised Firmmay treat an Exposureas 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 Exposuresand any seller provided Credit Enhancements;(c) the facility must not provide credit support by covering for any losses incurred in the underlying pool of Exposuresprior 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 Exposuresthat are in default;(f) where the facility is used to fund externally rated Securitiesthe facility can only be used to fund Securitiesthat are externally rated Investment Gradeat the time of funding;(g) the facility cannot be drawn after all Credit Enhancementsfrom 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 Exposuremeets 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.
PIB 4.14.45(1) An
Authorised Firmwhich provides credit protection for a basket of reference Exposuresthrough an unrated first-to-default Credit Derivativemay apply to the securitisation Exposurethe aggregate of the risk weights that would be assigned to the reference Exposures, provided that the resulting Capital Requirementdoes not exceed the notional amount of the credit protection.(2) An Authorised Firmwhich provides credit protection for a basket of reference Exposuresthrough an unrated second-to-default Credit Derivativemay apply the treatment referred to in (1), except that in aggregating the risk weights, the reference Exposurewith the lowest risk-weighted amount may be excluded.
PIB 4.14.46 PIB 4.14.46(1) Where an
Authorised Firmhas two or more overlapping Exposuresto a securitisation, the firm must, to the extent that the positions overlap, include in its calculation of Credit RWAamounts only the Exposure, or portion of the Exposure, producing the higher Credit RWAamounts.(2) For the purposes of (1), overlapping Exposuresresult where an Authorised Firmprovides 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 Firmprovides duplicate coverage to the underlying Exposures. The facilities provided by the Authorised Firmmay overlap since a draw on one facility may preclude (in part) a draw on the other facility.(3) Where the overlapping Exposuresare subject to different conversion factors the Authorised Firmmust apply the higher of the conversion factors to the Exposure.
PIB 4.14.46 Guidance
The firm may also recognise such an overlap between capital charges for
Specific Riskin 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 Firmmust calculate Capital Requirementfor the maximum amount of its Exposure.
Credit Risk Mitigation
Authorised Firmobtains credit protection on a securitisation Exposure, the calculation of Credit RWAamounts must be in accordance with the Rulesin Credit Riskmitigation in PIB section 4.13.
Authorised Firmprovides credit protection to a securitisation Exposureit must calculate a Capital Requirementas if it were an investor in the securitisation in line with PIB section 4.13.
Authorised Firmmust not recognise any SPE which is an Issuerof securitisation Exposures, as an eligible credit protection provider. Guarantees provided must meet the requirements of PIB section 4.13.
For the purpose of setting regulatory capital against a maturity mismatch, the
Capital Requirementmust be determined in accordance with PIB section 4.13. When Exposuresbeing hedged have different maturities, the longest maturity must be used. Maturity of credit protection must be calculated in accordance with PIB section 4.13.
Capital Requirements for Securitisations with Early Amortisation Provisions
PIB 4.14.51 PIB 4.14.51
Authorised Firmwhich is the Originatoror Sponsorof a securitisation involving revolving Exposuresas well as an Early Amortisationprovision, must calculate an additional RWAamount in accordance with PIB Rule 4.14.57 to address the possibility that its Credit Risk Exposurelevels may increase following the operation of the Early Amortisationprovision.
PIB 4.14.51 Guidance1. This section sets out the methodology for calculation of the
Credit RWAamount by an Originator, when it sells revolving Exposuresinto a securitisation that contains an Early Amortisationprovision.2. Early Amortisationof the Securitiesdescribes 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.
PIB 4.14.52(1) An
Authorised Firmwhich is the Originatoror Sponsorof a securitisation involving revolving Exposures, must calculate Credit RWAamounts in respect of the total Exposurerelated to a securitisation (both drawn and undrawn balances) when:(a) the Authorised Firmsells Exposuresinto a structure that contains an Early Amortisationfeature; and(b) the Exposuresare of a revolving nature.(2) Where the underlying pool of a securitisation comprises revolving and term Exposures, an Authorised Firmmust apply the amortisation treatment outlined below for determining applicable regulatory capital only to that portion of the underlying pool containing revolving Exposures.
PIB 4.14.53 PIB 4.14.53
Authorised Firmwhich is the Originatorof a Revolving Securitisationthat includes economic triggers for Early Amortisationmay regard the Exposuresas 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'srisk management system provides warning indicators when economic or non-economic triggers may be activated.
PIB 4.14.53 Guidance
Examples of such triggers include tax events, legal changes resulting in an
Authorised Firm'snon-performance in its role as a servicing agent, and triggers relating to the insolvency of the Originator.
Authorised Firmis not required to calculate a Capital Requirementfor Early Amortisationin the following situations:(a) replenishment structures where the underlying Exposuresdo not revolve and the Early Amortisationends the ability of the Authorised Firmto 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 Firmsecuritises 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 Originatoreven after an Early Amortisationevent has occurred; or(d) where the Early Amortisationclause 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.
Authorised Firmsubject to the Capital Requirementreferred to in PIB Rule 4.14.51, the maximum Credit RWAcalculated under that Rulemust not exceed the greater of the following:(a) the RWAamounts calculated in respect of its positions in the investors' interest; or(b) the RWAamounts that would be calculated in respect of the Securitised Exposures, if those had not been securitised.
Authorised Firmmust deduct from its CET1 Capital any gain-on-sale and Credit-Enhancing Interest-Only Stripsarising from any securitisation subject to the provisions of the Rulesabove.
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 Amortisationclause, the Credit RWAamounts for an Authorised Firmacting as the Originatorare 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 Exposuretype.
PIB 4.14.57 Guidance
In relation to PIB Rule 4.14.57(c), the
Authorised Firmshould 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 Exposuresare committed retail credit lines or credit lines (such as revolving credit facilities).
PIB 4.14.58(1) An
Early Amortisationprovision that does not satisfy the conditions for a Controlled Early Amortisationprovision will be treated as a non- Controlled Early Amortisationprovision.(2) For the purpose of (1), the conditions for a Controlled Early Amortisationprovision are as follows:(a) the Authorised Firmmust 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 Amortisationperiod 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).
For uncommitted retail credit lines in securitisations containing
Controlled Early Amortisationwhich is triggered by the Excess Spreadlevel falling to a specified level, an Authorised Firmmust compare the three month average Excess Spreadlevel with the Excess Spreadlevels at which the Excess Spreadis required to be trapped.
Where the securitisation does not require
Excess Spreadto be trapped, the trapping point is deemed to be 4.5 percentage points greater than the Excess Spreadlevel at which Early Amortisationis triggered.
Authorised Firmmust divide the Excess Spreadlevel by the transaction's Excess Spreadtrapping point to determine the appropriate segments and apply corresponding conversion factors as set out in the following table: Controlled Early Amortisationfeatures Uncommitted Committed Retail Credit Lines 3 Month average Excess SpreadCCF 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%
Non-Controlled Early Amortisation
In regard to non-
Controlled Early Amortisation, an Authorised Firmmust 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 Amortisationfeatures Uncommitted Committed Retail Credit Lines 3 Month average Excess SpreadCCF 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%
Transfers to Special Purpose Entities (SPEs)
Authorised Firmneed not include in its calculation of Capital Resourcesor Credit RWAamounts, assets transferred to:(a) an SPE; or(b) any Person, if the transfer is in connection with a securitisation under which the Issuerof the Securitiesis an SPE;
provided that:(c) the
Authorised Firmdoes not own any share or proprietary interest in the SPE;(d) no more than one member of the Governing Bodyof the SPE is an officer, partner, or Employeeof the Authorised Firm;(e) the SPE does not have a name that implies any connection with the Authorised Firmor any other member of the Authorised Firm's Group;(f) the Authorised Firmdoes not fund the SPE except where permitted under the requirements for Credit Enhancementbelow;(g) the Authorised Firmdoes 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 Firmdoes not bear any of the recurring expenses of the SPE; and(i) any agreements between the Authorised Firmand the SPE are at market rates and at arm's length.
Originatoracts as Underwriter for the Securitiesissued, the underlying items will not be regarded as being transferred until 90% of the total issuance has been sold to third parties.
Originatordealing in Securitieswhich would attract a Credit Quality Gradeof 4 or better and issued by an SPE must deduct any holdings in such Securitiesfrom its CET1 Capital unless the holding is subject to:(a) an ongoing limit of 3% of the Securitiesissued; and(b) a limit of 10% of the Securitiesissued for a period of five business days:(i) immediately following close of the transaction; or(ii) in the case of Revolving Securitisationsonly, at the beginning of the scheduled amortisation period.
Authorised Firmacting as the Originatorand 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.
Authorised Firmacting as the Originatormust not deal in the Securitiesduring the amortisation period.
Authorised Firmacting as the Sponsordealing in the Securitiesissued by the SPE must include these Securitiesin the calculation of its Credit RWAs.
Authorised Firminvolved in Synthetic Securitisationsmust seek individual guidance on a case-by-case basis from the DFSAregarding the regulatory treatment of such transactions.
Recognition of Eligible Financial Collateral under FCSA Approach
PIB 4.14.70 PIB 4.14.70
Authorised Firmwhich has taken eligible financial Collateralfor an SE Exposureand is using the FCSA may recognise the effect of the eligible financial Collateralas follows:(a) break down the SE Exposureinto:(i) a collateralised portion with E equal to the latest fair market value of the eligible financial Collateral; and(ii) an uncollateralised portion whose Exposurevalue equals the E of the SE Exposureless the latest fair market value of the eligible financial Collateral; and(b) apply the CRW that is applicable to the eligible financial Collateralto the collateralised portion calculated in accordance with (a)(i) to calculate the Credit RWAamount of the collateralised portion as though the Authorised Firmhad a direct Exposureto the eligible financial Collateral; and(c) either:(i) apply the CRW that is applicable to the SE Exposureto the uncollateralised portion calculated in accordance with (a)(ii) to calculate the Credit RWAamount of the uncollateralised portion; or(ii) include the uncollateralised portion as a deduction from CET1 Capital.
PIB 4.14.70 Guidance
Collateralin the context of a SE Exposurerefers to assets used to hedge the Credit Riskof a securitisation Exposurerather than the underlying Exposuresof the securitisation, including Collateralpledged by an SPE.
PIB 4.15 PIB 4.15 Concentration Risk
Applicability and Limits
For the purposes of this section an
Exposurethat arises in the Trading Bookis 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 Exposuresfor any Counterparty; and(c) any other Exposuresarising from transactions, agreements and contracts that would give rise to Counterparty Credit Risk.
For the purposes of this section an
Authorised Firmmust:(a) identify its Exposures;(b) identify its Counterparties, including whether any are Closely Relatedto each other or Connectedto the Authorised Firm;(c) measure the size of its Exposures;(d) establish the value of its Exposures;(e) determine the size of its Exposuresas a proportion of its Capital Resources;(f) identify whether it has Exposureswhich are subject to the requirements of PIB section 4.13 ( Credit Riskmitigation);(g) identify which, if any, of its Exposuresare 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 Exposuresto the same Counterpartyor group of Closely Related Counterpartiesor group of Connected Counterparties;(i) monitor and control its Exposureson a daily basis within the Concentration Risklimits; and(j) notify the DFSAimmediately of any breach of the limits set out in this section and confirm it in writing.
Large Exposure Limits
Large Exposureof an Authorised Firmmeans a total Exposurewhich 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 Bookor Non-Trading Book, or both.
PIB 4.15.5(1) Subject to IFR Rule 5.4.15, an
Authorised Firmmust ensure that Exposuresin its Non-Trading Bookand, subject to PIB Rule 4.15.6, Trading Bookto a Counterpartyor to a group of Closely Related Counterpartiesor to a group of Connected Counterparties, after taking into account the effect of any eligible Credit Riskmitigations, 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 Firmwhich 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.
Authorised Firm's Trading Book Exposureto a Counterpartyor to a group of Closely Related Counterpartiesor 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 Firmmust immediately give the DFSAwritten notice, explaining the nature of its Trading Book Exposureand seeking specific guidance from the DFSAregarding the prudential treatment of any such Exposure.
PIB 4.15.7 PIB 4.15.7
PIB 4.15.7 Guidance1.
Exposurescan arise in the Non-Trading Bookand in the Trading Bookfrom Credit Risk(for example on loans and advances) Counterparty Risk(for example, on unsettled trades and on Derivativecontracts) and from Issuerrisk (for example, on holdings of equities and bonds).2. Some Derivativescontracts may result in an Authorised Firmbeing exposed to an Issueras well as the Derivatives Counterparty. For example, a Derivativereferenced on a Securitymay result in an Exposureto the Counterparty, to the transaction and to the Issuerof the underlying Security.3. Examples of an Exposureare actual or potential claims on a Counterpartyincluding contingent liabilities arising in the normal course of an Authorised Firm'sbusiness.4. PIB App4 includes further Rulesand Guidanceon:a. fully and partially exempt Exposures, Exposuresto undisclosed Counterparties, parental guarantees and capital maintenance agreements;b. identification of Exposures;c. identification of Closely Relatedand Connected Counterparties, and exemptions for Connected Counterparties;d. measuring Exposuresto Counterpartiesand Issuersin relation to Derivatives, equity indices, and other items; ande. country risk Exposure.
Exclusions from the Large Exposure Limits
PIB 4.15.8(1) For the purposes of this section,
Exposureexcludes:(a) claims and other assets required to be deducted for the purposes of calculating an Authorised Firm'sTier 1 Capital;(b) a transaction entered into by an Authorised Firmas 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 Firmhas 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 Exposuresarising 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 Exposuresto Financial Institutionswho provide these services are excluded;(f) claims resulting from the purchase and sale of Securitiesduring settlement where both the Authorised Firmand the Counterpartyare 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(2) For the purposes of this section, Exposureto a CCP which carry a 0% CCR in accordance with PIB section 4.8 are excluded.
PIB 4.15.10 PIB 4.15.10
(1) This Rule applies to an Authorised Firm in Category 2 and 3A.
Exposuresto a Financial Institution, or a group of Connected Counterpartiesone of which is a Financial Institution, the total amount of an Authorised Firm's Exposuresmay exceed 25% of its Tier 1 Capital, provided those institutions are Investment Grade (Credit Quality Grades1 to 3) and subject to the following:(a) Exposuresto any entities within the group of Connected Counterpartiesthat are not Financial Institutionsare limited to 25% of Tier 1 Capital after taking account of Credit Riskmitigation;(b) the Exposuresmust not form part of the Tier 1 Capital of the Counterparty;(c) the Counterparty Riskprofile must be subject to review on at least an annual basis; and(d) Exposuresof this nature must not in any case exceed a maximum of US$ 100 million or 100% of Tier 1 Capital, whichever is the lower.
PIB 4.15.10 Guidance
DFSAwill, in exceptional circumstances, consider an application to waive or modify the limits set out above. In such circumstances the Authorised Firmwill have to make a submission to the DFSAas to why its specific circumstances would warrant a relaxation of the limits specified in (d) above.
Systems and Controls
PIB 4.15.11 PIB 4.15.11(1) An
Authorised Firmmust implement and maintain systems and controls to identify its Exposuresand effectively manage Concentration Risksas a result of its activities.(2) Such systems and controls in place must be proportionate to the nature, scale and complexity of the Authorised Firmand must include written policies and procedures to address Concentration Risks, both on and off balance sheet, which:(a) are approved by the Governing Bodyon at least an annual basis; and(b) include internal approval limits for Exposuresas well as limits for the risks associated with specific sectors, geographic location and single economic risk factors.
PIB 4.15.11 Guidance
DFSAexpects the systems and controls to include:a. processes for the tiered approval of Exposuresbased on size, risk profile and complexity;b. mechanisms for identifying, recording and monitoring all Exposureswith particular focus on Large Exposures;c. mechanisms in place for the monitoring and control of Exposuresto Counterpartiesand Groupsof Connected Counterparties;d. mechanisms for monitoring and recording Exposureswithin its Group;e. mechanisms to monitor Counterpartiesin the same economic sector and exposed to single economic risks;f. mechanisms to identify and control risks arising from single geographic jurisdictions; andg. mechanisms to identify risks arising from related activities or commodities.
Recognition of Credit Risk Mitigations
(1) For the purposes of this section, an
Authorised Firmmay 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 Exposureand is not held as part of a general provision or reserve against its Credit Risks;(b) Nettingits claims on and liabilities to a Counterparty, provided that the conditions in PIB section 4.13 of Credit Riskmitigation are met;(c) the amount of Collateralheld against its Exposures, where that Collateralis 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;(e) the value of a Credit Derivative, where the Credit Derivativeis 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 Risksfrom the Authorised Firmto 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.
Authorised Firmintending to utilise any of the provisions contained in PIB section 4.13 ( Credit Riskmitigation) for the purposes of reducing Exposurevalues should have in place policies and procedures addressing the following:(a) risks arising from maturity mismatches between Exposuresand any credit protection on those Exposures;(b) the Concentration Riskarising from the application of Credit Riskmitigation techniques, including indirect Large Exposures— for example to a single Issuerof Securitiestaken as Collateral; and(c) the conduct of stress testing on Credit Riskmitigation taken as Collateral.
Authorised Firmhas availed itself of the reductions to Exposurevalues as set out in PIB A4.11 the Authorised Firmmust calculate the Exposureas a percentage of its Tier 1 Capital on both a gross and net basis.
Authorised Firmthat avails itself of the reduction in its Exposurevalue through the application of PIB Rule A4.11 must conduct periodic stress tests on its Exposuresagainst the realisable value of any Collateralconsidered under with the FCSA or FCCA.
PIB 4.15.16 PIB 4.15.16
Where the value of the
Collateralunder the stress scenario is lower than the value applied under PIB Rule 4.15.12 the lower value should be used when determining the Exposurevalue for the purposes of this section.
PIB 4.15.16 Guidance
Such stress tests should include market value changes of underlying
Collateral, risks relating to liquidity and realisation of such Collateralin stress scenarios. An assessment of the impact of any such changes on the Exposurevalue and the capital position of the Authorised Firmshould be conducted. Stress testing of these positions should be conducted at least once a year.
PIB 4.15.17 PIB 4.15.17
Authorised Firmmust document its policy for the use of any of the exclusions in PIB Rule 4.15.12.
PIB 4.15.17 Guidance
Such policy should include risks such as maturity mismatches, stress testing of
Collateralvalues, indirect Exposuresarising from Credit Riskmitigation, such as mitigation provided on Exposuresby the same Counterparty.
Treatment of Parental Guarantees
PIB 4.15.18(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 Counterpartiesare 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 Firmmust 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 Gradeof 1 or 2 by a recognised credit rating agency;(vii) the Authorised Firmmust provide confirmation from the home state Financial Services Regulator that it is satisfied that the Parent Authorised Firmhas sufficient resources to provide such guarantees and has no objection to the provision of such guarantees;(viii) the Authorised Firmshould provide an annual confirmation that there are no changes to the enforceability of such guarantees; and(ix) the Authorised Firmmust 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%.