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  • 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]