Entire Section

  • PIB 4.15 PIB 4.15 Concentration Risk

    • Applicability and Limits

      • PIB 4.15.1

        This section applies with respect to Trading Book transactions as calculated in PIB App2 and Non-Trading Book transactions as calculated in PIB section 4.8.

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

      • PIB 4.15.2

        For the purposes of this section an Exposure that arises in the Trading Book is 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 Exposures for any Counterparty; and
        (c) any other Exposures arising from transactions, agreements and contracts that would give rise to Counterparty Credit Risk.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • PIB 4.15.3

        For the purposes of this section an Authorised Firm must:

        (a) identify its Exposures;
        (b) identify its Counterparties, including whether any are Closely Related to each other or Connected to the Authorised Firm;
        (c) measure the size of its Exposures;
        (d) establish the value of its Exposures;
        (e) determine the size of its Exposures as a proportion of its Capital Resources;
        (f) identify whether it has Exposures which are subject to the requirements of PIB section 4.13 (Credit Risk mitigation);
        (g) identify which, if any, of its Exposures are 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 Exposures to the same Counterparty or group of Closely Related Counterparties or group of Connected Counterparties;
        (i) monitor and control its Exposures on a daily basis within the Concentration Risk limits; and
        (j) notify the DFSA immediately of any breach of the limits set out in this section and confirm it in writing.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Large Exposure Limits

      • PIB 4.15.4

        A Large Exposure of an Authorised Firm means a total Exposure which 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 Book or Non-Trading Book, or both.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • PIB 4.15.5

        (1) Subject to IFR Rule 5.4.15, an Authorised Firm must ensure that Exposures in its Non-Trading Book and, subject to PIB Rule 4.15.6, Trading Book to a Counterparty or to a group of Closely Related Counterparties or to a group of Connected Counterparties, after taking into account the effect of any eligible Credit Risk mitigations, 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 Firm which 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.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • PIB 4.15.6

        Where an Authorised Firm's Trading Book Exposure to a Counterparty or to a group of Closely Related Counterparties or 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 Firm must immediately give the DFSA written notice, explaining the nature of its Trading Book Exposure and seeking specific guidance from the DFSA regarding the prudential treatment of any such Exposure.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • PIB 4.15.7 PIB 4.15.7

        Subject to IFR Rule 5.4.16 an Authorised Firm must ensure that the sum of its Large Exposures does not exceed 800% of its Tier 1 Capital.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

        • PIB 4.15.7 Guidance

          1. Exposures can arise in the Non-Trading Book and in the Trading Book from Credit Risk (for example on loans and advances) Counterparty Risk (for example, on unsettled trades and on Derivative contracts) and from Issuer risk (for example, on holdings of equities and bonds).
          2. Some Derivatives contracts may result in an Authorised Firm being exposed to an Issuer as well as the Derivatives Counterparty. For example, a Derivative referenced on a Security may result in an Exposure to the Counterparty, to the transaction and to the Issuer of the underlying Security.
          3. Examples of an Exposure are actual or potential claims on a Counterparty including contingent liabilities arising in the normal course of an Authorised Firm's business.
          4. PIB App4 includes further Rules and Guidance on:
          a. fully and partially exempt Exposures, Exposures to undisclosed Counterparties, parental guarantees and capital maintenance agreements;
          b. identification of Exposures;
          c. identification of Closely Related and Connected Counterparties, and exemptions for Connected Counterparties;
          d. measuring Exposures to Counterparties and Issuers in relation to Derivatives, equity indices, and other items; and
          e. country risk Exposure.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Exclusions from the Large Exposure Limits

      • PIB 4.15.8

        (1) For the purposes of this section, Exposure excludes:
        (a) claims and other assets required to be deducted for the purposes of calculating an Authorised Firm's Tier 1 Capital;
        (b) a transaction entered into by an Authorised Firm as 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 Firm has 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 Exposures arising 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 Exposures to Financial Institutions who provide these services are excluded;
        (f) claims resulting from the purchase and sale of Securities during settlement where both the Authorised Firm and the Counterparty are 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
        (g) Exposures that are guaranteed by the Authorised Firms Parent in accordance with PIB Rule 4.15.18.
        (2) For the purposes of this section, Exposure to a CCP which carry a 0% CCR in accordance with PIB section 4.8 are excluded.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

    • PIB 4.15.9

      An Authorised Firm need not include fully exempt Exposures, as referred to in PIB Rule A4.11.1 when monitoring compliance with the limits in Rules PIB 4.15.5, PIB 4.15.6 and PIB 4.15.7.

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

    • Institutional Exemption

      • PIB 4.15.10 PIB 4.15.10

        (1) This Rule applies to an Authorised Firm in Category 2 and 3A.

        (2) For Exposures to a Financial Institution, or a group of Connected Counterparties one of which is a Financial Institution, the total amount of an Authorised Firm's Exposures may exceed 25% of its Tier 1 Capital, provided those institutions are Investment Grade (Credit Quality Grades 1 to 3) and subject to the following:

        (a) Exposures to any entities within the group of Connected Counterparties that are not Financial Institutions are limited to 25% of Tier 1 Capital after taking account of Credit Risk mitigation;
        (b) the Exposures must not form part of the Tier 1 Capital of the Counterparty;
        (c) the Counterparty Risk profile must be subject to review on at least an annual basis; and
        (d) Exposures of this nature must not in any case exceed a maximum of US$ 100 million or 100% of Tier 1 Capital, whichever is the lower.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

        • PIB 4.15.10 Guidance

          The DFSA will, in exceptional circumstances, consider an application to waive or modify the limits set out above. In such circumstances the Authorised Firm will have to make a submission to the DFSA as to why its specific circumstances would warrant a relaxation of the limits specified in (d) above.

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

    • Systems and Controls

      • PIB 4.15.11 PIB 4.15.11

        (1) An Authorised Firm must implement and maintain systems and controls to identify its Exposures and effectively manage Concentration Risks as a result of its activities.
        (2) Such systems and controls in place must be proportionate to the nature, scale and complexity of the Authorised Firm and must include written policies and procedures to address Concentration Risks, both on and off balance sheet, which:
        (a) are approved by the Governing Body on at least an annual basis; and
        (b) include internal approval limits for Exposures as well as limits for the risks associated with specific sectors, geographic location and single economic risk factors.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.15.11 Guidance

          The DFSA expects the systems and controls to include:

          a. processes for the tiered approval of Exposures based on size, risk profile and complexity;
          b. mechanisms for identifying, recording and monitoring all Exposures with particular focus on Large Exposures;
          c. mechanisms in place for the monitoring and control of Exposures to Counterparties and Groups of Connected Counterparties;
          d. mechanisms for monitoring and recording Exposures within its Group;
          e. mechanisms to monitor Counterparties in the same economic sector and exposed to single economic risks;
          f. mechanisms to identify and control risks arising from single geographic jurisdictions; and
          g. mechanisms to identify risks arising from related activities or commodities.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Recognition of Credit Risk Mitigations

      • PIB 4.15.12

        (1) For the purposes of this section, an Authorised Firm may 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 Exposure and is not held as part of a general provision or reserve against its Credit Risks;
        (b) Netting its claims on and liabilities to a Counterparty, provided that the conditions in PIB section 4.13 of Credit Risk mitigation are met;
        (c) the amount of Collateral held against its Exposures, where that Collateral is 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;
        (d) the amount of any eligible guarantees as permitted under PIB section 4.13.9;
        (e) the value of a Credit Derivative, where the Credit Derivative is 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 Risks from the Authorised Firm to 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.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Added] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • PIB 4.15.13

        An Authorised Firm intending to utilise any of the provisions contained in PIB section 4.13 (Credit Risk mitigation) for the purposes of reducing Exposure values should have in place policies and procedures addressing the following:

        (a) risks arising from maturity mismatches between Exposures and any credit protection on those Exposures;
        (b) the Concentration Risk arising from the application of Credit Risk mitigation techniques, including indirect Large Exposures — for example to a single Issuer of Securities taken as Collateral; and
        (c) the conduct of stress testing on Credit Risk mitigation taken as Collateral.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.15.14

        Where an Authorised Firm has availed itself of the reductions to Exposure values as set out in PIB A4.11 the Authorised Firm must calculate the Exposure as a percentage of its Tier 1 Capital on both a gross and net basis.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • PIB 4.15.15

        An Authorised Firm that avails itself of the reduction in its Exposure value through the application of PIB Rule A4.11 must conduct periodic stress tests on its Exposures against the realisable value of any Collateral considered under with the FCSA or FCCA.

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

      • PIB 4.15.16 PIB 4.15.16

        Where the value of the Collateral under the stress scenario is lower than the value applied under PIB Rule 4.15.12 the lower value should be used when determining the Exposure value for the purposes of this section.

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

        • PIB 4.15.16 Guidance

          Such stress tests should include market value changes of underlying Collateral, risks relating to liquidity and realisation of such Collateral in stress scenarios. An assessment of the impact of any such changes on the Exposure value and the capital position of the Authorised Firm should be conducted. Stress testing of these positions should be conducted at least once a year.

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

      • PIB 4.15.17 PIB 4.15.17

        An Authorised Firm must document its policy for the use of any of the exclusions in PIB Rule 4.15.12.

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

        • PIB 4.15.17 Guidance

          Such policy should include risks such as maturity mismatches, stress testing of Collateral values, indirect Exposures arising from Credit Risk mitigation, such as mitigation provided on Exposures by the same Counterparty.

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

    • Treatment of Parental Guarantees

      • PIB 4.15.18

        An Authorised Firm may exclude an Exposure from the Concentration Risk limits set out in PIB Rules 4.15.5 to 4.15.7 where:

        (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 Counterparties are 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 Firm must 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 Grade of 1 or 2 by a recognised credit rating agency;
        (vii) the Authorised Firm must provide confirmation from the home state Financial Services Regulator that it is satisfied that the Parent Authorised Firm has sufficient resources to provide such guarantees and has no objection to the provision of such guarantees;
        (viii) the Authorised Firm should provide an annual confirmation that there are no changes to the enforceability of such guarantees; and
        (ix) the Authorised Firm must 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%.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]