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  • PIB 4.9 PIB 4.9 Methodology for Measurement of Exposures

    • PIB 4.9.1 PIB 4.9.1

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

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

      • PIB 4.9.1 Guidance

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

    • PIB 4.9.2

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

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

    • Measurement of E for On-Balance Sheet Assets

      • PIB 4.9.3 PIB 4.9.3

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

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

        • PIB 4.9.3 Guidance

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

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

      • PIB 4.9.4 PIB 4.9.4

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

        • PIB 4.9.4 Guidance

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

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

      • PIB 4.9.5

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

      • PIB 4.9.6

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

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

      • PIB 4.9.7

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

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

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

      • PIB 4.9.8

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

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

      • PIB 4.9.9

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

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

      • PIB 4.9.10

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

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

      • PIB 4.9.11

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

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

    • Measurement of E for Counterparty Exposures

      • PIB 4.9.11 Guidance

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

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

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

      • PIB 4.9.12

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

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

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

      • PIB 4.9.13

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

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

      • PIB 4.9.14

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

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

      • PIB 4.9.15

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

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

      • PIB 4.9.16

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

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

      • PIB 4.9.17

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

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

      • PIB 4.9.18

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

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

      • PIB 4.9.19

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

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

      • PIB 4.9.20

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

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

    • Exceptions to the Measurement of E

      • PIB 4.9.21 PIB 4.9.21

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

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

        • PIB 4.9.21 Guidance

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

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