Entire Section
Recognition of Credit Risk Mitigations
PIB 4.15.12
(1) For the purposes of this section, an
Authorised Firm may reduce the value of itsExposures , 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 thatExposure and is not held as part of a general provision or reserve against itsCredit Risks ;(b)Netting its claims on and liabilities to aCounterparty , provided that the conditions in PIB section 4.13 ofCredit Risk mitigation are met;(c) the amount ofCollateral held against itsExposures , where thatCollateral 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 aCredit Derivative , where theCredit 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 transferringCredit Risks from theAuthorised 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 reducingExposure values should have in place policies and procedures addressing the following:(a) risks arising from maturity mismatches betweenExposures and any credit protection on thoseExposures ;(b) theConcentration Risk arising from the application ofCredit Risk mitigation techniques, including indirectLarge Exposures — for example to a singleIssuer ofSecurities taken asCollateral ; and(c) the conduct of stress testing onCredit Risk mitigation taken asCollateral .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 toExposure values as set out in PIB A4.11 theAuthorised Firm must calculate theExposure 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 itsExposure value through the application of PIB Rule A4.11 must conduct periodic stress tests on itsExposures against the realisable value of anyCollateral 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 theExposure 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 suchCollateral in stress scenarios. An assessment of the impact of any such changes on theExposure value and the capital position of theAuthorised 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, indirectExposures arising fromCredit Risk mitigation, such as mitigation provided onExposures by the sameCounterparty .Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]