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.