Entire Section

  • Credit Derivatives

    • PIB 4.13.11

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

    • PIB 4.13.12 PIB 4.13.12

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

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

      • PIB 4.13.12 Guidance

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