Entire Section

  • General Requirements

    • PIB 4.13.1 PIB 4.13.1

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

      • PIB 4.13.1 Guidance

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

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

    • PIB 4.13.2

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

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

    • PIB 4.13.3 PIB 4.13.3

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

      • PIB 4.13.3 Guidance

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

    • PIB 4.13.4

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