Entire Section

  • PIB App4 PIB App4 Credit Risk

    • PIB A4.1 PIB A4.1 Credit Risk Systems and Controls

      • PIB A4.1 Guidance

        1. Depending on an Authorised Firm's nature, scale, frequency, and complexity of Credit Risk granted or incurred, the Credit Risk policy of an Authorised Firm should address the following elements:
        a. how, with particular reference to its activities, the Authorised Firm defines and measures Credit Risk;
        b. the Authorised Firm's business aims in incurring Credit Risk including:
        i. identifying the types and sources of Credit Risk to which the Authorised Firm wishes to be exposed (and the limits on that Exposure) and those to which the Authorised Firm wishes not to be exposed;
        ii. specifying the level of diversification required by the Authorised Firm and the Authorised Firm's tolerance for risk concentrations and the limits on those Exposures and concentrations; and
        iii. stating the risk-return that the Authorised Firm is seeking to achieve on Credit Risk Exposures;
        c. types of facilities to be offered, along with ceilings, pricing, profitability, maximum maturities and maximum debt-servicing ratios for each type of lending;
        d. a ceiling for the total loan portfolio, in terms, for example, of the loan-to-deposit ratio, undrawn commitment ratio, a maximum dollar amount or a percentage of capital base;
        e. portfolio limits for maximum aggregate Exposures by country, industry, category of borrower/Counterparty (e.g. banks, non-bank financial institutions, corporates and retail), product (e.g. property lending), Groups of related parties and single borrowers;
        f. limits, terms and conditions, approval and review procedures and records kept for Connected lending — all Authorised Firms should have a formal policy statement, endorsed by the Governing Body, on such lending covering these matters;
        g. types of acceptable Collateral, loan-to-value ratios and the criteria for accepting guarantees; and
        h. how Credit Risk is assessed both when credit is granted or incurred and subsequently, including how the adequacy of any security and other risk mitigation techniques are assessed;
        i. the detailed limit structure for Credit Risk, which should:
        i. address all key risk factors, including intra-Group Exposures;
        ii. be commensurate with the volume and complexity of activity; and
        iii. be consistent with the Authorised Firm's business aims, historical performance, and the level of capital the Authorised Firm is willing to risk;
        j. procedures for:
        i. approving new products and activities which give rise to Credit Risk;
        ii. regular risk position and performance reporting;
        iii. limit exception reporting and approval; and
        iv. identifying and dealing with problem Exposures;
        k. the allocation of responsibilities for implementing the Credit Risk policy and for monitoring adherence to, and the effectiveness of, the policy; and
        l. the required information systems, staff and other resources.
        2. The Credit Risk policy should emphasize the principles of prudence and should be enforced consistently. The policy and its implementation should ensure that credit facilities are only granted to credit-worthy customers and that risk concentrations are avoided.
        3. The Credit Risk strategy and policy need to be clearly disseminated to, and understood by all relevant staff.
        4. The Credit Risk policy of an Authorised Firm should clearly specify the delegation of its credit approval authorities. Credit authority thus delegated should be appropriate for the products or portfolios assigned to the credit committee or individual credit officers and should be commensurate with their credit experience and expertise. An officer's credit authority may, however, be increased on the basis of his or her track record. An Authorised Firm should ensure that credit authority is required for acquiring any types of credit Exposures, including the use of Credit Derivatives for hedging or income generation.
        5. Credit authority delegated to the credit committee and each credit officer should be subject to regular review to ensure that it remains appropriate to current market conditions and the level of their performance.
        6. An Authorised Firm's remuneration policies should be consistent with its Credit Risk strategy. The policies should not encourage officers to generate short-term profits by taking an unacceptably high level of risk.

        Counterparty Risk assessment

        7. The Authorised Firm should make a suitable assessment of the risk profile of its Counterparties. The factors to be considered will vary according to both the type of credit and Counterparty such as whether the Counterparty is a company or a sovereign Counterparty and may include:
        a. the purpose of the credit and the source of repayment;
        b. an assessment of the skill, integrity and quality of management and overall reputation of the Counterparty;
        c. the legal capacity of the Counterparty to assume the liability to the Authorised Firm;
        d. an assessment of the nature and amount of risk attached to the Counterparty in the context of the industrial sector or geographical region or country in which it operates and the potential impact on the Counterparty of political, economic and market changes; this assessment may include consideration of the extent and nature of the Counterparty's other financial obligations;
        e. the Counterparty's repayment history as well as an assessment of the Counterparty's current and future capacity to repay obligations based on financial statements, financial trends, cash flow projections and the potential impact of adverse economic scenarios;
        f. an analysis of the risk-return trade-off, with regard to the proposed price of the credit facility;
        g. the proposed terms and conditions attached to the granting of credit, including on-going provision of information by the Counterparty, covenants attached to the facility, the adequacy and enforceability of Collateral and guarantees; and
        h. the Authorised Firm's existing Exposure to the individual Counterparty, sector, country or product and the availability of credit given Exposure limits.
        8. An Authorised Firm should document any variation from the usual credit policy.
        9. An Authorised Firm involved in loan syndications or consortia should not rely on other parties' assessments of the Credit Risks involved but should conduct a full assessment against its own Credit Risk policy.
        10. An Authorised Firm granting credit to obligors in other countries should be cognisant of the additional risks — country risk and transfer risk — involved in such credits. An Authorised Firm should therefore consider the environment — economic and political — in the relevant countries, the potential effect of changes thereto on the obligors' ability to service the credit and the contagion effects in regions where economies are closely related.
        11. The exception reporting should be adequately supported by a management reporting system whereby relevant reports on the credit portfolio are generated to various levels of management on a timely basis.
        12. Connected Counterparties should be identified and the procedures for the management of the combined Credit Risk considered. It may be appropriate for Authorised Firms to monitor and report the aggregate Exposure against combined limits in addition to monitoring the constituent Exposures to the individual Counterparties.
        13. An Authorised Firm should consider whether it needs to assess the credit-worthiness of suppliers of goods and services to whom it makes material prepayments or advances.

        Risk assessment: Derivative Counterparties

        14. An Authorised Firm should include in its Credit Risk policy an adequate description of:
        a. how it determines with which derivative Counterparties to do business;
        b. how it assesses and continues to monitor the credit-worthiness of those Counterparties;
        c. how it identifies its actual and contingent Exposure to the Counterparty; and
        d. whether and how it uses credit loss mitigation techniques, e.g. margining, taking security or Collateral or purchasing credit insurance.
        15. In assessing its contingent Exposure to a Counterparty, the Authorised Firm should identify the amount which would be due from the Counterparty if the value, index or other factor upon which that amount depends were to change.
        16. An Authorised Firm should clearly specify the delegation of its credit approval authorities. Credit authority thus delegated should be appropriate for the products or portfolios assigned to the credit committee or individual credit officers and should be commensurate with their credit experience and expertise. An officer's credit authority may, however, be increased on the basis of his her track record. An Authorised Firm should ensure that credit authority is required for acquiring any types of credit Exposures, including the use of Credit Derivatives for hedging or income generation.
        17. Credit authority delegated to the credit committee and each credit officer should be subject to regular review to ensure that it remains appropriate to current market conditions and the level of their performance.

        Credit approval procedures

        18. An Authorised Firm should adhere closely to the "Know Your Customer" principle and should not lend purely on name and relationship without a comprehensive assessment of the credit quality of the borrower.
        19. Credit decisions should be supported by adequate evaluation of the borrower's repayment ability based on reliable information. Sufficient and up-to-date information should continue to be available to enable effective monitoring of the account.
        20. All credits should be granted on an arm's length basis. Credits to related borrowers should be monitored carefully and steps taken to control or reduce the risks of Connected lending.
        21. An Authorised Firm should not rely excessively on Collateral or guarantees as Credit Risk mitigants. Such Credit Risk mitigants may provide secondary protection to the lender if the borrower defaults, the primary consideration for credit approval should be the borrower's debt-servicing capacity.
        22. An Authorised Firm should be sensitive to rapid expansion of specific types of lending. Such trends may often be accompanied by deterioration of credit standards and thus merit increased focus on more marginal borrowers.
        23. An Authorised Firm should ensure through periodic independent audits that the credit approval function is being properly managed and that credit Exposures comply with prudential standards and internal limits. The results of such audits should be reported directly to the Governing Body, the credit committee or senior management as appropriate.

        Risk control

        24. An Authorised Firm should consider setting credit limits for maximum Exposures to single and Connected Counterparties, as well as limits for aggregate Exposures to economic sectors, geographic areas, and on total Credit Risk arising from specific types of products. By limiting Exposures in these categories, an Authorised Firm can manage credit Exposure more carefully and avoid excessive concentrations of risk.
        25. The Credit Risk policy of an Authorised Firm should include a policy to control and monitor Large Exposures and other risk concentrations. An Authorised Firm should carefully manage and avoid excessive risk concentrations of various kinds. These include Exposure to:
        a. individual borrowers (in particular Exposure exceeding 10% of the firm's capital base);
        b. Groups of borrowers with similar characteristics, economic and geographical sectors; and
        c. types of lending with similar characteristics (e.g. those based on assets with similar price behaviour).
        26. Notwithstanding the Concentration Risk limit specified as part of the prudential Rules on Large Exposures, Authorised Firms should exercise particular care in relation to facilities exceeding 10% of capital base.
        27. Authorised Firms should recognise and control the Credit Risk arising from their new products and services. Well in advance of entering into business transactions involving new types of products and activities, they should ensure that they understand the risks fully and have established appropriate Credit Risk policies, procedures and controls, which should be approved by the Governing Body or its appropriate delegated committee. A formal risk assessment of new products and activities should also be performed and documented.
        28. An Authorised Firm in Category 1, 2, 3A or 5 is also subject to concentration limits and notification requirements as spelt out in PIB chapter 4.

        Risk measurement

        29. An Authorised Firm should measure its Credit Risk using a robust and consistent methodology, which should be described in its Credit Risk policy. The Authorised Firm should consider whether the measurement methodology should be back-tested and the frequency of any such back-testing.
        30. An Authorised Firm should also be able to measure its total Exposure across the entire credit portfolio or within particular categories such as Exposures to particular industries, economic sectors or geographical areas.
        31. Where an Authorised Firm is a member of a Group, the Group should be able to monitor credit Exposures on a consolidated basis.
        32. An Authorised Firm should have the capability to measure its credit Exposure to individual Counterparties on at least a daily basis.
        33. Authorised Firms should analyse their credit portfolios to identify material inter-dependencies which can exaggerate risk concentrations. The importance can be illustrated by the contagion effects that a substantial decline in property or stock prices may have on the default rate of those commercial and industrial loans which rely heavily on such types of Collateral.
        34. Authorised Firms should establish a system of regular independent credit and compliance audits. These audits should be performed by independent parties, e.g. internal audit and compliance, which report to the Governing Body or the audit committee.
        35. Credit audits should be conducted to assess individual credits on a sampling basis and the overall quality of the credit portfolio. Such audits are useful for evaluating the performance of account officers and the effectiveness of the credit process. They can also enable Authorised Firms to take early measures to protect their loans.

        Risk monitoring

        36. An Authorised Firm should implement an effective system for monitoring its Credit Risk, which should be described in its Credit Risk policy. The system may monitor the use of facilities, adherence to servicing requirements and covenants, and monitor the value of Collateral and identify problem accounts.
        37. An Authorised Firm should consider the implementation of a system of management reporting which provides relevant, accurate, comprehensive, timely and reliable Credit Risk reports to relevant functions within the Authorised Firm.
        38. Adequacy and sophistication of Credit Risk measurement tools required depends on the complexity and degree of the inherent risks of the products involved. An Authorised Firm should have information systems and analytical techniques that provide sufficient information on the risk profile and structure of the credit portfolio. These should be flexible to help Authorised Firm to identify risk concentrations. To achieve this, an Authorised Firm system should be capable of analysing its credit portfolio by the following characteristics:
        a. size of Exposure;
        b. Exposure to Groups of related borrowers;
        c. products;
        d. sectors, e.g. geographic, industrial;
        e. borrowers' demographic profile for consumer credits, e.g. age or income group, if appropriate;
        f. account performance;
        g. internal credit ratings;
        h. outstandings versus commitments; and
        i. types and coverage of Collateral.
        39. An Authorised Firm should have procedures for taking appropriate action according to the information within the management reports, such as a review of Counterparty limits.
        40. Particular attention should be given to the monitoring of credit that does not conform to usual Credit Risk policy, or which exceeds predetermined credit limits and criteria, but is sanctioned because of particular circumstances. Unauthorised exceptions to policies, procedures and limits should be reported in a timely manner to the appropriate level of management.
        41. Individual credit facilities and overall limits and sub-limits should be periodically reviewed in order to check their performance and appropriateness for both the current circumstances of the Counterparty and in the Authorised Firm's current internal and external economic environment. The frequency of review will usually be more intense for higher-risk Counterparties or larger Exposures or in fluctuating economic conditions.
        42. An Authorised Firm should have in place a system for monitoring the overall quality of its Credit Risk Exposures under normal and stressful conditions. There should also be a reporting system which s management to aggregate Exposures approaching various pre-set portfolio limits.
        43. An Authorised Firm should be mindful of business and economic cycles and regularly stress-test their portfolios against adverse market scenarios. Adequate contingency planning should be developed in conjunction with stress-testing to address the possibility of crises developing in a very rapid fashion.
        44. Appropriate stress testing of credit Exposures can be an essential part of the credit management process. Examination of the potential effects of economic or industry downturns, market events, changes in interest rates, changes in foreign exchange rates and changes in liquidity conditions can provide valuable information about an Authorised Firm's Credit Risk. This information can be utilised to inform the Authorised Firm's on-going credit strategy.
        45. As new techniques for Credit Risk management, monitoring and reporting are developed, the Authorised Firm should ensure they are tested and evaluated before undue reliance is placed upon them.
        46. Where the account officer for a credit (or customer relationship manager, branch manager or similar) moves on, the incoming officer should carry out a take-over review. The review should cover inter alia the credit-worthiness of the borrowers, the adequacy of the documentation, compliance with covenants, performance of each loan and the existence and value of any Collateral.

        Problem Exposures

        47. An Authorised Firm should have processes for the timely identification and management of problem Exposures. These processes should be described in the Credit Risk policy.
        48. An Authorised Firm involved in providing credit should establish a dedicated unit to handle the recovery and work-out of problem loans and should establish policies for the referral of loans to this unit.
        49. An Authorised Firm should ensure that its loan portfolio is properly classified and has an effective early-warning system for problem loans.
        50. An Authorised Firm should develop and implement internal risk rating systems for managing Credit Risk. The rating system should be consistent with the nature, size and complexity of the Authorised Firm's activities. In using internal risk ratings, an Authorised Firm should seek to achieve a high granularity in the rating system and adopt multiple grades for loans that are not yet irregular and to develop the ability to track the migration of individual loans through the various internal credit ratings.
        51. Depending on the size and nature of the Authorised Firm, it may be appropriate for problem Exposures to be managed by a specialised function, independent of the functions that originate the business or maintain the on-going business relationship with the Counterparty.
        52. Exposures identified as problems or potential problems should be closely monitored by management, and an Authorised Firm should set out, for example, whether a loan grading system or a watch or problem list is used and, in the latter case, the criteria for adding an asset to or taking an asset off that list.
        53. It is recommended that Authorised Firms establish a dedicated unit to handle the recovery and work-out of problem loans and put in place policies for the referral of loans to this unit.
        54. An Authorised Firm should have adequate procedures for recovering Exposures in arrears or those which had provisions made against them. These should allocate responsibility both internally and externally for its arrears management and recovery and define the involvement of the Authorised Firm's solicitors.
        55. Requirements relating to provisioning against loss on problem Exposures are covered in PIB chapter 4.

        Risk mitigation

        56. Various methods can be used to mitigate Credit Risk, such as taking security or Collateral, obtaining a guarantee from a third party, purchasing insurance or Credit Derivatives. Authorised Firms should view these as complementary to, rather than a replacement for, thorough credit analysis and procedures.
        57. In controlling Credit Risk, an Authorised Firm may utilise certain mitigation techniques. Normally, they include:
        a. accepting Collateral, standby letters of credit and guarantees;
        b. entering into Netting arrangements,
        c. setting strict loan covenants; and
        d. using Credit Derivatives and other hedging instruments.
        58. In determining which types of credit mitigation techniques should be used, firms should also consider:
        a. their own knowledge and experience in using such techniques;
        b. cost-effectiveness;
        c. type and financial strength of the Counterparties or Issuers;
        d. correlation with the underlying credits;
        e. availability, liquidity and realisability of the credit mitigation instruments;
        f. the extent to which legally recognised documentation, e.g. ISDA Master Agreement, can be adopted; and
        g. the degree of supervisory recognition of the mitigation technique.
        59. While mitigation through Collateral and guarantees is usually dealt with at the time of granting of credits, Credit Derivatives and Netting are often employed after the credit is in place, or used to manage the overall portfolio risk. When the mitigation arrangements are in place they should then be controlled. Authorised Firms should have written policies, procedures and controls for the use of credit mitigation techniques. They should also ensure adequate systems are in place to manage these activities.
        60. Authorised Firms should revalue their Collateral and mitigation instruments on a regular basis. The method and frequency of revaluation depends on the nature of the hedge and the products involved.
        61. If an Authorised Firm takes security or Collateral, on credit facilities, appropriate policies and procedures should be documented covering:
        a. the types of security or Collateral considered;
        b. procedures governing the valuation and revaluation of security or Collateral including the basis of valuation;
        c. policies governing the taking of security or Collateral, including obtaining appropriate legal title; and
        d. policies governing possession of security or Collateral.
        62. The value of security and Collateral should be monitored at an appropriate frequency. For example, commercial property might be revalued annually, whereas Securities provided as Collateral should be marked to market usually on a daily basis. Residential property may not need to be revalued annually, but information should be sought as to general market conditions.
        63. When taking Collateral in support of an Exposure, an Authorised Firm should ensure that legal procedures have been followed, to ensure the Collateral can be enforced if required.
        64. An Authorised Firm should consider the legal and financial ability of a guarantor to fulfil the guarantee if called upon to do so.
        65. An Authorised Firm should analyse carefully the protection afforded by risk mitigants such as Netting agreements or Credit Derivatives, to ensure that any residual Credit Risk is identified, measured, monitored and controlled.
        66. An Authorised Firm providing mortgages at high loan-to-value ratios should consider the need for alternative forms of protection against the risks of such lending, including mortgage indemnity insurance, to protect against the risk of a fall in the value of the property.

        Record keeping

        67. The Authorised Firm should maintain appropriate records of:
        a. credit Exposures, including aggregations of credit Exposures, by:
        i. Groups of Connected Counterparties; and
        ii. types of Counterparty as defined, for example, by the nature or geographical location of the Counterparty;
        b. credit decisions, including details of the facts or circumstances upon which a decision was made; and
        c. information relevant to assessing current credit quality.
        68. Credit records should be retained for at least six years, subject to any requirement in the Rules requiring such records to be kept for a longer period.
        69. It is important that sound and legally enforceable documentation is in place for each credit agreement as this may be called upon in the event of a default or dispute. An Authorised Firm should therefore consider whether it is appropriate for an independent legal opinion to be sought on documentation used by the Authorised Firm. Documentation should be in place before the Authorised Firm enters into a contractual obligation or releases funds.

        Country and transfer risk Exposure

        70. PIB chapter 4 does not provide limits on the size of an Authorised Firm's Exposure to a particular country or region. However, an Authorised Firm which has Large Exposures in a country or region should include in its Credit Risk policy:
        a. the geographical areas in which the Authorised Firm does or intends to do business;
        b. its definition of Credit Risk Exposure and transfer risks (such as exchange restrictions) associated with doing business in each country or region;
        c. how to measure its total Exposure in each country or region and across several countries or regions;
        d. the types of business the Authorised Firm intends to undertake in each country or region;
        e. limits on Exposures to an individual country or region which the Authorised Firm deals with, and sub-limits for different types of business if appropriate;
        f. the procedure for setting and reviewing country or regional limits; and
        g. the process by which the Authorised Firm's actual country or regional Exposures will be monitored against limits and the procedure to be followed if the limits are breached.
        71. When setting country or regional limits, an Authorised Firm should consider:
        a. the economic and political circumstances prevailing in the country or region;
        b. the transfer risks associated with any particular country or region;
        c. the type and maturity of business undertaken by the Authorised Firm in a particular country or region;
        d. the Authorised Firm's existing concentration of country or regional risk;
        e. the source of funding for the country or regional Exposure; and
        f. sovereign or other guarantees offered.

        Provisioning

        72. Depending upon the nature of the Authorised Firm and its business, the Authorised Firm's provisioning policy should set out:
        a. who has responsibility for reviewing the provisioning policy and approving any changes;
        b. how frequently the policy should be reviewed;
        c. when the review will take place, including the circumstances in which a review might be more frequent;
        d. who has primary responsibility for ensuring the provisioning policy remains appropriate, including any division of responsibilities;
        e. the areas of its business to which the provisioning policy relates — it should include both on balance sheet and off balance sheet Exposures and assets;
        f. where it takes different approaches to different lines of its business and the key features of those differences;
        g. who has responsibility for monitoring its asset portfolio on a regular basis in order to identify problem or potential problem assets and the factors it takes into account in identifying them;
        h. whether a loan grading system or a watch or problem list is used and, in the latter case, the criteria for adding an asset to or taking an asset off that list;
        i. the extent to which the value of any Collateral, guarantees or insurance which the Authorised Firm holds affects the need for or size of provision;
        j. on what basis the Authorised Firm makes its provisions, including the extent to which the level of provisioning is left to managerial judgement or to a committee or involves specified formulae and the methodologies or debt management systems and other formulae used to determine provisioning levels for different business lines and the factors applied within these methodologies;
        k. who is responsible for ensuring that the Authorised Firm's provisioning policy is being implemented properly, and the measures the Authorised Firm has in place if its provisioning polices are not adhered to;
        l. who is responsible for the regular reviews of the Authorised Firm's specific and general provisions and who decides whether provision levels are satisfactory. The reviews should take account of changes in the status of the Exposures and potential losses and changes in the conditions associated with them;
        m. the reports used to enable management to ensure that the Authorised Firm's provisioning levels remain satisfactory, the frequency and purpose of those reports and their circulation;
        n. the procedures for recovering Exposures in arrears or Exposures which have had provisions made against them, including who has responsibility both internally and externally for its arrears management and recovery and the involvement of the Authorised Firm's solicitors;
        o. the procedures and methodologies for writing off and writing back provisions, including treatment of interest and who has the relevant responsibility for determining these;
        p. the frequency of any review of its write off experience against provisions raised; such a review can help identify whether an Authorised Firm's policies result in over or under provisioning across the business cycle, and contribute to a general review of an Authorised Firm's provisioning policy and the design of any loan grading systems, Credit Risk models, and risk pricing; and
        q. the Authorised Firm's procedures and methodologies for calculating and raising provisions for contingent and other liabilities, how frequently they should be reviewed and who has the relevant responsibilities. Other liabilities include the crystallisation of contingent liabilities such as acceptances, endorsements, guarantees, performance bonds, indemnities, irrevocable letters of credit and the confirmation of documentary credits.
        73. Provisions may be general (against the whole of a given portfolio) or specific (against particular Exposures identified as bad or doubtful), or both. The DFSA expects contingent liabilities and anticipated losses to be recognised in accordance with the applicable accounting standards.
        74. Appropriate systems and controls for provisions vary with the nature, scale and complexity of the credit granted. An Authorised Firm for which the extension of credit is a substantial part of its business is expected to have greater regard to developing, implementing and documenting a provisioning policy than an Authorised Firm for which Credit Risk is incidental to the operation of its business.
        75. The DFSA recognises that the frequency with which an Authorised Firm reviews its provisioning policy once it has been established will vary from firm to firm. However, the DFSA expects an Authorised Firm to review its policy to ensure it remains appropriate for the business it undertakes and the economic environment in which it operates. The provisioning policy should be reviewed at least annually by the Governing Body.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.2 PIB A4.2 Credit Conversion Factors (CCFs) for Calculating Exposures

      • CCFs for Off-Balance Sheet CR Exposures

        • PIB A4.2.1 PIB A4.2.1

          The applicable CCFs for off-balance sheet CR Exposures are provided in the table below.

            Description of Off-balance Sheet Item CCF
          (a) Direct credit substitutes 100%
          (b) Transaction-related contingent items 50%
          (c) Short-term self-liquidating trade-related contingent items (applicable to both issuing and confirming banks) and commitments to underwrite debt and equity Securities 20%
          (d) Note issuance facilities and revolving Underwriting facilities 50%
          (e) Transactions, other than SFTs, involving the posting of Securities held by the Authorised Firm as Collateral 100%
          (f) Asset sales with recourse, where the Credit Risk remains with the Authorised Firm 100%
          (g) Other commitments with certain drawdown 100%
          (h) Other commitments
          (i) with an Original Maturity of more than one year
          (ii) with an Original Maturity of one year or less
          (iii) which are unconditionally cancellable at any time by the Authorised Firm without prior notice, or that effectively provide for automatic cancellation due to deterioration in an obligor's creditworthiness
          50%

          20%

          0%
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.2.1 Guidance

            1. In cases where there is an undertaking to provide a commitment on another off-balance sheet Exposure, an Authorised Firm should apply the lower of the applicable CCFs. Examples of direct credit substitutes include general guarantees of indebtedness, standby letters of credit serving as financial guarantees for loans and Securities, and acceptances (including endorsements with the character of acceptances). Examples of transaction-related contingent items include performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions.
            2. Documentary credits collateralised by the underlying shipments are an example of short-term self-liquidating trade-related contingent items. In respect of item (f) in the table above, the terms of the agreement should be such that there is no substantial transfer of all risks and rewards of ownership to the Counterparty. Other commitments with certain drawdown would include forward purchase, forward deposits and partly paid Securities. Formal standby facilities and credit lines are examples of other commitments, referred to in item (h) of the table above.
            3. In respect of item (h)(iii) in the table above, an Authorised Firm, if required to by the DFSA, should be able to demonstrate that it actively monitors the financial condition of the obligor, and that its internal control systems are such that it is able to cancel the facility upon evidence of a deterioration in the credit quality of the obligor.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • CCFs for Off-Balance Sheet SE Exposures

        • PIB A4.2.2 PIB A4.2.2

          (1) The applicable CCFs for off-balance sheet SE Exposures are provided in the table below.
            Description of off-balance sheet item CCF
          (a) Unrated eligible liquidity facilities 50%
          (b) Eligible Servicer cash advance facilities 0%
          (c) Others 100%
          (2) An Authorised Firm must notify the DFSA if it intends to provide eligible Servicer cash advance facilities and when there is a drawdown.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.2.2 Guidance

            Eligible Servicer cash advance facilities refers to undrawn Servicer cash advances or facilities that are contractually provided for and unconditionally cancellable without prior notice, so long as the Servicer is entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying Exposures.

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

    • PIB A4.3 PIB A4.3 Collateral Calculations and Haircuts

      • "Core Market Participants"

        • PIB A4.3.1

          For the purposes of this section, "core market participant" means:

          (a) any central government or Central Bank;
          (b) any PSE;
          (c) any qualifying MDB;
          (d) any banking institution or securities firm;
          (e) any financial institution eligible for a 20% risk weight under PIB section 4.12;
          (f) any central Counterparty;
          (g) any regulated mutual fund that is subject to capital or leverage requirements; or
          (h) any regulated pension fund.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Calculation of E* for Collateralised Transactions Other than OTC Derivative Transactions and Long Settlement Transactions

        • PIB A4.3.2

          An Authorised Firm using the FCCA to calculate E* must adjust both the amount of the Exposure to the Counterparty and the value of any Collateral received in support of that Counterparty to take into account possible future fluctuations in the value of either due to market movements, by using the methods and haircuts set out in Rules PIB A4.3.6 to PIB A4.3.29.

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

        • PIB A4.3.3

          An Authorised Firm must calculate the appropriate haircuts to be applied using one of the following methods:

          (a) standard supervisory haircuts; or
          (b) own-estimate haircuts.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.4

          [Not currently in use]

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

        • PIB A4.3.5 PIB A4.3.5

          (1) As an alternative to the use of standard supervisory haircuts or own-estimate haircuts, an Authorised Firm may, subject to DFSA approval, use VaR models to reflect the price volatility of the Exposure and Collateral for SFTs which are covered by a qualifying bilateral Netting agreement. The requirements relating to the use of this approach are set out in PIB section A4.5.
          (2) An Authorised Firm may seek the DFSA's approval referred to in (1) only if it has al received the DFSA's approval to use the internal models approach for calculating the Market Risk Capital Requirement.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.3.5 Guidance

            Approval for the use of the internal model approach is governed by PIB section 5.11 of PIB chapter 5 (Market Risk).

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

        • PIB A4.3.6 PIB A4.3.6

          An Authorised Firm using standard supervisory haircuts or own-estimate haircuts under the FCCA must calculate E* for any collateralised transaction not covered by a qualifying bilateral Netting agreement or a qualifying cross-product Netting agreement other than OTC Derivative transactions or long settlement transactions, using the following formula:

          E* = max {0, [E (or EAD)(1 + HE) – C(1 – HC – HFX)]}

          where;

          E* = Exposure value after risk mitigation;

          E = fair value of the Exposure calculated in accordance with PIB section 4.9;

          HE = haircut appropriate to the Exposure;

          C = fair value of the eligible financial Collateral received;

          HC = haircut appropriate to the Collateral, or if the Collateral is a basket of assets, the weighted sum of the haircuts appropriate to the assets in the basket where each weight is the proportion of the asset in the basket in units of currency; and

          HFX = haircut appropriate for currency mismatch between the Collateral and Exposure.

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

          • PIB A4.3.6 Guidance

            Where the residual maturity of the Collateral is shorter than the residual maturity of the Exposure, the Authorised Firm must substitute PA calculated in accordance with Rules PIB 4.13.14 to PIB 4.13.16 for C(1 − HC − HFX).

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

        • PIB A4.3.7

          An Authorised Firm using standard supervisory haircuts or own-estimate haircuts under the FCCA must calculate E* for any collateralised transaction covered by a qualifying bilateral Netting agreement or qualifying cross-product Netting agreement other than OTC Derivative transactions or long settlement transactions, using the following formula:

          E* = Max {0, [ Σ (E ) − Σ (C) + add-on]}

          where:

          E* = Exposure value after risk mitigation;

          E = fair value of the Exposure calculated in accordance with PIB section 4.9;

          C = fair value of eligible financial Collateral received; and

          Add-on = the add-on amount to reflect the market price volatility and foreign exchange volatility, calculated in accordance with PIB Rule A4.3.8 below.

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

        • PIB A4.3.8 PIB A4.3.8

          An Authorised Firm must calculate the add-on using one of the following approaches:

          (a) the approach according to the following formula:
          add on = Σ ((ES )(HS )) + Σ ((EFX )(HFX ))
          where:

          ES = absolute value of the net position in a given Security;

          HS = haircut appropriate to ES

          EFX = absolute value of the net position in a currency different from the settlement currency; and

          HFX = haircut appropriate for currency mismatch between the Collateral and Exposure;

          or
          (b) the approach using VaR models, provided the Authorised Firm has received approval from the DFSA as referred to in PIB Rule A4.3.5.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.3.8 Guidance

            Approval for the use of the internal model approach is governed by PIB section 5.11 of PIB chapter 5 .

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

        • PIB A4.3.9

          Subject to Rules PIB A4.3.10 to PIB A4.3.12, an Authorised Firm must determine HE, HC, HS and HFX referred to in Rules PIB A4.3.6 to PIB A4.3.8, in accordance with the standard supervisory haircuts in the table forming part of PIB Rule A4.3.13.

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

        • PIB A4.3.10

          An Authorised Firm may calculate HE, HC, HS and HFX using own-estimate haircuts in accordance with Rules PIB A4.3.17 to PIB A4.3.23 if it has received approval from the DFSA to use the internal models approach for calculating the Market Risk Capital Requirement. If the Authorised Firm chooses to use own-estimate haircuts, it must do so consistently for determining haircuts for all eligible financial Collateral and all portfolios, except that it may, with the approval of the DFSA, use the standard supervisory haircuts in Rules PIB A4.3.13 to PIB A4.3.16 for any portfolio which is immaterial in size and risk profile.

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

        • PIB A4.3.11

          An Authorised Firm may apply a value of zero to HE, HC and HS in the case of a qualifying SFT with a core market participant. This approach is not available to an Authorised Firm using VaR models in accordance with PIB section A4.5 to calculate E*.

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

        • PIB A4.3.12

          An Authorised Firm may apply a value of zero to HE, HC and HS in the case of an SFT where both the Exposure and Collateral are Securities issued by central governments where a value of zero has been prescribed by the banking regulator of that jurisdiction and Exposures to the central government of that jurisdiction have a Credit Quality Grade of 1 as set out in the table in PIB Rule 4.12.4.

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

      • Standard Supervisory Haircuts

        • PIB A4.3.13 PIB A4.3.13

          The standard supervisory haircuts, HE, HC and HS referred in Rules PIB A4.3.6 to PIB A4.3.8 (assuming daily remargining or revaluation and a ten-business day holding period), are subject to PIB Rule A4.3.14, as follows:

          Eligible Financial Collateral Standard Supervisory Haircuts
          Issue Rating for Debt Securities Residual Maturity Central Governments or Central Banks Other Issuers
          Any debt security with a Credit Quality Grade of 1 or short-term Credit Quality Grade of "I". ≤ 1 year 0.005 0.01
          > 1 year, ≤ 5 years 0.02 0.04
          > 5 years 0.04 0.08
          Any debt security with a Credit Quality Grade of 2 or 3 or short-term Credit Quality Grade of "II" and "III" and unrated bank securities as defined in PIB Rule 4.13.5(d). ≤ 1 year 0.01 0.02
          > 1 year, ≤ 5 years 0.03 0.06
          > 5 years 0.06 0.12
          Any debt security with a Credit Quality Grade of 4. All 0.15 NA
          Gold 0.15
          Any equity (including a convertible bond) included in a main index. 0.15
          Any other equity (including a convertible bond) traded on a regulated exchange. 0.25
          Any Unit in a Collective Investment Fund. highest haircut applicable to any Security in which the fund can invest
          Cash in the same currency as the underlying Exposure. 0
          Instruments in the Trading Book other than those listed (for pre-settlement Counterparty Exposures arising from SFTs included in the Trading Book). 0.25
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.3.13 Guidance

            PSEs and MDBs should be treated as equivalent to central governments for the purpose of this table.

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

        • PIB A4.3.14

          The standard supervisory haircut, HE, for transactions in which an Authorised Firm lends instruments that do not qualify as eligible financial Collateral (e.g. corporate debt Securities with a Credit Quality Grade of 4 or worse) is 0.25.

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

        • PIB A4.3.15

          The standard supervisory haircut, HFX, for currency mismatch where Exposure and Collateral are denominated in different currencies based on a ten-business day holding period and daily revaluation is 0.08.

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

        • PIB A4.3.16

          Where the minimum holding period, frequency of remargining or revaluation assumptions set out for eligible financial Collateral in PIB Rule A4.3.13 differ from those of the Authorised Firm, the Authorised Firm must adjust HE, HC and HS using the formulae in Rules PIB A4.3.25 to PIB A4.3.26.

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

      • Own-Estimate Haircuts

        • PIB A4.3.17

          (1) An Authorised Firm must apply for approval from the DFSA if it intends to use own-estimate haircuts.
          (2) An Authorised Firm must not use own-estimate haircuts unless it has received approval to adopt the internal models approach to calculate the Market Risk Capital Requirement.
          (3) The DFSA may grant approval for an Authorised Firm to use own-estimate haircuts subject to such conditions or restrictions as the DFSA may impose.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.18

          If An Authorised Firm becomes aware after it has received approval to use own-estimate haircuts that it no longer complies with any of the requirements in Rules PIB A4.3.17 to PIB A4.3.23 or any of the conditions or restrictions imposed by the DFSA pursuant to PIB Rule A4.3.17 or no longer meets the Rules, it must

          (a) inform the DFSA as soon as practicable;
          (b) assess the effect of the situation in terms of the risk posed to the Authorised Firm;
          (c) prepare a plan to rectify the situation and inform the DFSA of its plan as soon as practicable; and
          (d) undertake prompt corrective action within a reasonable time in accordance with the plan prepared pursuant to (c).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.19

          If An Authorised Firm fails to comply with PIB Rule A4.3.18, the DFSA may revoke its approval for the Authorised Firm to use own-estimate haircuts. The Authorised Firm may also be required to revise its estimates for the purpose of calculating regulatory Capital Requirements if its estimates of E*, does not adequately reflect its Exposure to Counterparty Credit Risk.

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

      • Requirements for Use of Own-Estimate Haircuts

        • PIB A4.3.20

          An Authorised Firm using own-estimate haircuts must estimate the volatility for each individual instrument that is taken as eligible financial Collateral. In estimating such volatility, the Authorised Firm must not take into account the correlations between unsecured Exposures, Collateral and exchange rates. Where there are maturity mismatches, the Authorised Firm must apply Rules PIB 4.13.14 to PIB 4.13.16.

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

        • PIB A4.3.21

          An Authorised Firm must ensure that the model used to estimate volatilities captures all the material risks run by it.

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

        • PIB A4.3.22 PIB A4.3.22

          In calculating the haircuts using internal estimates of volatilities, an Authorised Firm must:

          (a) use a 99th percentile, one-tailed confidence interval;
          (b) use the minimum holding period and remargining or revaluation conditions according to the type of transaction as set out in Rules PIB A4.3.24 to PIB A4.3.26. Where the minimum holding period, remargining or revaluation conditions used by an Authorised Firm differ from those set out above, it must adjust the haircuts using the formulae in Rules PIB A4.3.25 to PIB A4.3.26;
          (c) use a historical observation period (i.e. sample period) of at least one year. Where the Authorised Firm uses a weighting scheme or other methods for the historical observation period, the "effective" observation period must be at least one year (i.e. the weighted average time lag of the individual observations must not be less than six months);
          (d) update its data sets at least once every three months and recalculate haircuts at least once every three months. The DFSA may require more frequent updates whenever there is an increase in volatility in market prices of the Collateral; and
          (e) use the estimated volatility data in the day-to-day risk management process of the Authorised Firm and if the Authorised Firm is using a longer holding period for risk management compared to the ones prescribed in Rules PIB A4.3.24 to PIB A4.3.26., then the longer holding period must also be applied for the calculation of haircuts.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.3.22 Guidance

            1. An Authorised Firm should:
            a. take into account the illiquidity of lower quality Collateral and should adjust the holding period upwards in cases where such a holding period would be inappropriate given the liquidity of the Collateral; and
            b. identify where historical data may understate potential volatility (e.g. a pegged currency); and deal with such cases by subjecting the data to stress testing.
            2. An Authorised Firm, when considering the market liquidity of a Collateral, should consider four dimensions:
            a. immediacy, which refers to the speed with which a trade of a given size at a given cost is completed;
            b. depth, which refers to the maximum size of a trade for any given bid-ask spread;
            c. tightness, which refers to the difference between buy and sell prices; and
            d. resiliency, which refers to how quickly prices revert to original or fundamental levels after a large transaction.
            3. The Authorised Firm should have experienced persons familiar with the relevant market for the Collateral to judge the market liquidity of the Collateral and determine if the minimum holding period is sufficient for any given Collateral. The holding period should be deemed to be insufficient if the value of the Collateral would move by more than 1% should the Collateral be liquidated within the minimum holding period in these Rules, taking into account the immediacy, depth, tightness and resiliency of the market. In such a situation, the holding period should be adjusted upwards, such that the Collateral can be safely liquidated within the period, without causing a price movement of more than 1% relative to the value after the haircut.
            4. An Authorised Firm should aim to update its data sets daily in line with industry practice. If the Authorised Firm updates its data sets less than once every three months, it should be able to demonstrate to the DFSA that the volatilities of the market prices are stable. In addition, where the updating of data sets is less frequent, the DFSA will normally expect compensating controls in the form of stress testing.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.23 PIB A4.3.23

          An Authorised Firm must have robust and effective processes in place for ensuring compliance with documented internal policies, controls and procedures concerning the operation of the risk measurement system to support the use of own-estimate haircuts.

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

          • PIB A4.3.23 Guidance

            In order to demonstrate compliance with PIB Rule A4.3.23, an Authorised Firm should give due regard to the following expectations of the DFSA:

            (a) the risk measurement system should be used in conjunction with internal Exposure limits;
            (b) the risk management processes of an Authorised Firm relating to the use of own-estimate haircuts should be subject to internal audit at least once a year, covering the following areas:
            (i) the integration of risk measures into daily risk management;
            (ii) the validation of any significant change in the risk management process;
            (iii) the accuracy and completeness of position data;
            (iv) the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources; and
            (v) the accuracy and appropriateness of volatility assumptions.
            (c) such internal audits referred to in (b) are not to be confused with an internal validation of the risk management systems surrounding the use of own-estimate haircuts. All significant risk models employed to support the use of own-estimate haircuts should be validated at least once a year. The internal audits serve as an independent process check to help ensure that the validation is sufficiently robust and effective.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Minimum Holding Periods, Remargining or Revaluation Conditions

        • PIB A4.3.24

          The following table sets out the minimum holding periods and remargining or revaluation conditions for different types of transactions where an Authorised Firm uses own-estimate haircuts:

          Minimum holding periods and remargining/revaluation conditions

          Transaction type Minimum holding period Remargining/ Revaluation Condition
          Repos, reverse repos, Securities or commodities lending or Securities or commodities borrowing transactions 5 business days daily remargining
          OTC Derivative transactions and margin lending transactions 10 business days daily remargining
          Exposures secured by eligible financial Collateral 20 business days daily revaluation
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.25

          Where the assumed minimum holding period is not met or remargining or revaluation conditions are not fulfilled, an Authorised Firm must calculate the applicable haircut using the following formula:

          H = HM √{[NR + (TM − 1)]/ TM}

          where —

          "H" refers to the haircut;

          "HM" refers to the haircut under the minimum holding period;

          "TM" refers to the minimum holding period for the type of transaction or eligible financial Collateral; and

          "NR" refers to the actual number of business days between remargining or revaluation, as the case may be.

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

        • PIB A4.3.26

          When an Authorised Firm uses a holding period, TN, which is different from the specified minimum holding period, TM, the Authorised Firm must calculate HM using the following formula:

          HM = HN√(TM/TN)

          where —

          "TN" refers to the holding period used by the Authorised Firm for deriving HN; and

          "HN" refers to the haircut based on the holding period TN.

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

      • Recognition of Eligible Financial Collateral under FCSA

        • PIB A4.3.27

          Subject to PIB A4.3.28, an Authorised Firm which has taken eligible financial Collateral for a CR Exposure and is using the FCSA may recognise the effects of Credit Risk mitigation of the eligible financial Collateral as follows:

          (a) break down the Exposure into —
          (i) a collateralised portion with E equal to the latest fair value of the eligible financial Collateral; and
          (ii) an uncollateralised portion with E equal to the E of the CR Exposure less the latest fair value of the eligible financial Collateral;
          and
          (b) for the purposes of calculating the Credit RWA amount pursuant to PIB Rule 4.8.3, use:
          (i) for the collateralised portion, the CRW that is applicable to the eligible financial Collateral as though the Authorised Firm had a direct Exposure to that Collateral; and
          (ii) for the uncollateralised portion, the CRW that is applicable to the obligor.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.28

          If the CRW determined in accordance with A4.3.27(b)(i) is less than 20%, an Authorised Firm must apply a CRW of 20% to the collateralised portion of the CR Exposure, except in the following cases:

          (a) a qualifying SFT where the Counterparty in the transaction is a core market participant, in which case the Authorised Firm may apply a risk weight of 0%;
          (b) a qualifying SFT where the Counterparty in the transaction is not a core market participant, in which case the Authorised Firm may apply a risk weight of 10%;
          (c) an OTC Derivative transaction subject to daily mark-to-market that is collateralised by cash, and where there is no currency mismatch, in which case the Authorised Firm may apply a risk weight of 0%;
          (d) an OTC Derivative transaction subject to daily mark-to-market that is collateralised by Exposures to central governments, Central Banks or PSE or a combination thereof qualifying for a 0% risk weight in accordance with the Rules in PIB chapter 4, and where there is no currency mismatch, in which case the Authorised Firm may apply a risk weight of 10%; and
          (e) a transaction where there is no currency mismatch and the Collateral comprises —
          (i) cash on deposit as set out in PIB Rule 4.13.5(a); or
          (ii) Exposures in the central government and Central Bank asset class or in the PSE asset class or a combination thereof qualifying for a 0% risk weight under the Rules in PIB section 4.12, and the latest fair value of such Collateral has been discounted by 20% for the purposes of determining the value of the collateralised portion of the CR Exposure in accordance with PIB Rule A4.3.27(a)(i),
          in which case the Authorised Firm may apply a CRW of 0%.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.29

          An Authorised Firm which is using FCSA must not recognise the effects of Credit Risk mitigation of any Collateral with a maturity mismatch.

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

    • PIB A4.4 PIB A4.4 Qualifying Securities Financing Transactions (SFTs)

      • PIB A4.4.1

        A qualifying SFT must comply with the following requirements:

        (a) both the Exposure and the Collateral are cash, or a Security issued by a central government or Central Bank qualifying for a 0% risk weight under the Rules in PIB section 4.12;
        (b) both the Exposure and the Collateral are denominated in the same currency;
        (c) either the transaction is overnight or both the Exposure and the Collateral are marked-to-market daily and are subject to daily remargining;
        (d) following a Counterparty's failure to remargin, the time that is required between the last mark-to-market before the failure to remargin and the liquidation of the Collateral is considered to be no more than four business days;
        (e) the transaction is settled across a recognised settlement system for that type of transaction;
        (f) the documentation covering the agreement is standard market documentation for repos, reverse repos, Securities, lending transactions or Securities borrowing transactions in the Securities concerned;
        (g) the transaction is governed by documentation specifying that if the Counterparty fails to satisfy an obligation to deliver cash or Securities or to deliver margin, or otherwise defaults, then the transaction may be terminated immediately; and
        (h) upon any event of default, regardless of whether the Counterparty is insolvent or bankrupt, the Authorised Firm has the unfettered, legally enforceable right to immediately seize and liquidate the Collateral for the benefit of the Authorised Firm.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.5 PIB A4.5 Requirements for Use of VaR Models

      • PIB A4.5.1 PIB A4.5.1

        An Authorised Firm using VaR models must:

        (a) use a minimum holding period of ten business days except in the case of an SFT, for which it must use a minimum holding period of five business days;
        (b) backtest its output by:
        (i) identifying a sample of 20 Counterparties, on an annual basis, which must include the ten largest Counterparties as determined by the Authorised Firm according to its own Exposure measurement approach and ten others selected at random;
        (ii) comparing, for each day and for the sample of 20 Counterparties, the VaR estimate of the previous day for the Counterparty portfolio to the difference between the net value of the previous day's portfolio using today's market prices and the net value of that portfolio using the previous day's market prices; and
        (iii) counting it as an exception, where this difference exceeds the previous day's VaR estimate.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.5.1 Guidance

          An Authorised Firm should adjust the minimum holding period upwards for any Financial Instrument where the specified holding period would be inappropriate given the liquidity of the instrument concerned. When the outcome of the model consistently results in a large number of exceptions, either overall or for one significant Counterparty, the Authorised Firm is expected to review the model assumptions and make modifications as appropriate.

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

    • PIB A4.6 PIB A4.6 Credit RWA — Unsettled Transactions, free deliveries and OTC Derivatives

      • PIB A4.6 Guidance

        1. Where settlement does not occur on the due date and neither party has released the relevant cash or Securities, an Authorised Firm faces Market Risk, namely the differential between the contract price of the Securities and their current value in the market. In this case an Authorised Firm also faces a Credit Risk Exposure for the Unsettled Transaction, for which the Authorised Firm is required to hold regulatory capital. The relevant Credit Risk Exposure should be included in the calculation of Credit RWA for the Authorised Firm.
        2. An Authorised Firm is at risk for the whole amount of the contract (as well as any further movement in price) if it has delivered its leg of a contract before receipt of the other leg. In this case an Authorised Firm must calculate the Credit Risk RWA for the free delivery transaction.
        3. For OTC Derivatives and other contracts, an Authorised Firm is exposed to settlement risk. For an OTC Derivative contract, the risk is that the price moves in an Authorised Firm's favour so that it makes a book profit but at maturity the Authorised Firm cannot realise that profit because the other party defaults. The amount at risk is therefore less than the Authorised Firm's nominal Exposure and is measured by calculating the proportion of the nominal Exposure considered to be at risk -the Credit Equivalent Amount.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.6.1

        The section applies in respect of items in both the Trading Book and Non-Trading Book.

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

      • PIB A4.6.2

        CRWs must be calculated on the Counterparty to the transaction, not on the Issuer of the Security.

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

      • PIB A4.6.3

        When calculating its Credit RWA, an Authorised Firm must not include RWA arising from a transaction if it is a negative amount.

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

      • PIB A4.6.4

        CRW is applied in accordance with PIB section A4.3 except that the maximum CPW for an OTC Derivative is 50%.

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

      • Unsettled Transactions

        • PIB A4.6.5

          An Authorised Firm must calculate the Credit RWA for transactions in which debt instruments, equities, foreign currencies and commodities (excluding repos, reverse repos and Securities or commodities lending/borrowing) remain unsettled after their due delivery dates, using the following formula:

          Credit RWA on Unsettled Transactions = E x the appropriate percentage from the second column in the table below:

          Number of business days after due settlement date Percentages used for calculation of Credit RWA on Unsettled Transactions
          0–4 0%
          5–15 100%
          16–30 500%
          31–45 750%
          46 or more 1000%
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.6

          If assets involved in the transaction are to be received by the Authorised Firm and the transaction remains unsettled: E = MV-CV.

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

        • PIB A4.6.7

          If assets involved in the transaction are to be delivered by the Authorised Firm and the transaction remains unsettled: E = CV-MV. If the values for E calculated above are negative, E = 0.

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

        • PIB A4.6.8 PIB A4.6.8

          An Authorised Firm must determine E for an unsettled non-DvP transaction as equal to the outstanding receivables after the end of the first contractual payment or delivery date.

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

          • PIB A4.6.8 Guidance

            1. E is the price difference to which the Authorised Firm is exposed, being the difference between the agreed settlement price for the debt instrument, equity, foreign currency or commodity in question and its current market value, where the difference could involve a loss for the firm.
            2. In cases of a system-wide failure of a settlement or clearing system, an Authorised Firm need not calculate CRCOM on transactions remaining unsettled till the settlement or clearing system is brought back to normal operations.
            3. In respect of unsettled non-DvP transactions referred to in PIB Rule A4.6.8, if the dates when two payment legs are made are the same according to the time zones where each payment is made, they are deemed to have been settled on the same day.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Free Delivery Transactions

        • PIB A4.6.9

          The CRW for transactions in which an Authorised Firm has:

          (a) delivered Securities or commodities before receiving payment;
          (b) paid for Securities or commodities before receiving the items purchased; or
          (c) entered into a foreign exchange contract undertaken in the spot market or contracted for forward settlement and has released funds to its Counterparty but has not yet received the funds in the other currency;

          is calculated by the formula:

          Credit RWA on free deliveries = E x CRW x the multiplier from the table below:

          Number of business days since delivery multiplier used for calculation of Credit RWA on free deliveries
          0–15 1
          16–30 5
          31–45 7.5
          46 or more 10
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A.4.6.10

          If an Authorised Firm has delivered commodities or Securities to a Counterparty and has not received payment: E = CV due to the Authorised Firm.

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

        • PIB A4.6.11

          If an Authorised Firm has made payment to a Counterparty for commodities or Securities and has not received them: E = MV of the commodities or Securities.

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

        • PIB A4.6.12

          If the settlement of the transaction is to be effected across a national border, Credit RWA needs to be calculated only when more than one business day has elapsed since the firm has made the relevant payment or delivery.

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

        • PIB A4.6.13

          In the case of a Non-Trading Book item, an Authorised Firm must treat an Exposure in accordance with the relevant provisions of PIB chapter 4.

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

      • Financial Derivatives

        • PIB A4.6.14

          For the purposes of calculating Credit RWA, a financial Derivative includes, but is not limited to OTC Derivatives and Credit Derivatives. Exposures dealt with under this section do not include Exposures to CCPs which qualify for a zero Exposure value.

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

        • PIB A4.6.15 PIB A4.6.15

          For OTC Derivative transactions: Credit RWA = CEA x CRW.

          where:

          (a) contracts traded on exchanges, where they are subject to daily margining requirements, are excluded; and
          (b) CEA is calculated using the formula:
          CEA = the replacement cost of the OTC Derivative contract (obtained by marking to market) (in the case of a transaction with negative replacement cost, a value of zero) + PFCE.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.6.15 Guidance

            Details of how to net the PFCE are given in PIB Rule A4.6.22.

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

        • PIB A4.6.16

          (1) In case of Credit Derivatives including but not limited to total return swaps and credit default swaps, an Authorised Firm must determine its PFCE by multiplying the nominal amount of the instrument by the following percentages:
          (a) 5% where the reference obligation of the Credit Derivative is one that if it gave rise to a direct Exposure of the Authorised Firm would be a qualifying reference obligation; or
          (b) 10% where the reference obligation is one that if it gave rise to a direct Exposure of the Authorised Firm would not be a qualifying reference obligation.
          (2) For the purposes of this Rule, a "qualifying reference obligation" means any Security that is issued by any MDB, any Security (including one issued by a PSE) that has a Credit Quality Grade of 3 or better as set out in PIB section 4.12 based on the external credit assessment of at least one recognised external credit rating agency, and any unrated Security issued by a PSE which belongs to a country with a Credit Quality Grade of 1 as set out in PIB section 4.12.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.17

          In the case of credit default swaps, an Authorised Firm which is a seller of credit protection may assign a PFCE of 0%, unless the protection is subject to close-out on the insolvency of the buyer.

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

        • PIB A4.6.18 PIB A4.6.18

          In cases where a Credit Derivative provides protection in relation to "nth to default" amongst a number of underlying obligations, an Authorised Firm must apply a percentage in accordance with PIB Rule A4.6.16 applicable to the obligation with the nth lowest credit quality determined by whether it is one that if incurred by the Authorised Firm would be a qualifying reference obligation for the purposes of PIB Rule A4.6.16(1)(a).

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

          • PIB A4.6.18 Guidance

            Where the Credit Derivative is a first to default transaction, the appropriate percentage for the PFCE will be determined by the lowest credit quality of the underlying obligations in the basket. If there are nonqualifying items in the basket, the percentage applicable to the non-qualifying reference obligations should be used. For second and any subsequent default transactions, underlying assets should continue to be allocated according to credit quality: i.e. for a second to default transaction, the applicable percentage figure is the percentage applicable to the second lowest credit quality.

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

        • PIB A4.6.19

          For OTC Derivative transactions other than Credit Derivatives, PFCE is calculated by multiplying the NP of the contract by the appropriate percentage from the table below.

          Type of contract Residual maturity of contract
          <1 Year 1–5 Years >5 Years
          Single currency interest rate basis swaps 0.0% 0.0% 0.0%
          Interest rate Single currency interest rate swaps other than basis swaps
          Multiple currency basis swaps
          Forward-rate agreements
          Interest rate futures
          Interest rate Options purchased
          Derivatives referenced on an Investment Grade debt Item
          Other contracts of a similar nature to those in this box.
          0.0% 0.5% 1.5%
          Foreign exchange (including gold) except as referred to in A4.6.20 Cross-currency interest-rate swaps.

          Forward foreign exchange contracts.

          Currency futures.

          Currency Options purchased.

          Other contracts of a similar nature to those in this box, including gold.
          1.0% 5.0% 7.5%
          Equities Cash settled forward contracts

          Contracts of a nature similar to those in the interest rate and foreign exchange boxes.

          Derivatives referenced on a bond which is not an Investment Grade debt Item.
          6.0% 8.0% 10.0%
          Precious metals (except gold) Contracts of a nature similar to those in the interest rate and foreign exchange boxes concerning precious metals, except gold. 7.0% 7.0% 8.0%
          Commodities (except precious metals) and any other contracts Contracts of a nature similar to those in the interest rate or foreign exchange boxes concerning commodities other than precious metals. 10.0% 12.0% 15.0%
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.20

          If the contract is an OTC foreign exchange contract (not including gold) with an Original Maturity of 14 days or less: CEA = 0.

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

        • PIB A4.6.21 PIB A4.6.21

          Where a contract price is based upon more than one underlying instrument, the higher of the relevant PFCE multipliers must be used.

          Netting of PFCE

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

          • PIB A4.6.21 Guidance

            An Authorised Firm may calculate the PFCE arising under OTC derivative contracts on a net basis.

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

        • PIB A4.6.22

          Where the conditions in in PIB section 4.13 are met, an Authorised Firm may calculate its net PFCE on OTC derivative contracts using the following formula:

          PFCE reduced = 0.4 x PFCE gross + 0.6 x NGR x PFCE gross

          where:

          (a) "PFCE reduced" is the reduced figure for PFCE for all contracts with a given Counterparty included in the Netting agreement;
          (b) "PFCE gross" is the sum of the figures for PFCE for all contracts with a given Counterparty which are included in the Netting agreement; and
          (c) "NGR" is the net-to-gross ratio, being the quotient of the net replacement cost for all contracts included in the Netting agreement with a given Counterparty (numerator) and the gross replacement cost for all contracts included in the Netting agreement with that Counterparty (denominator).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.23

          For the purposes of PIB Rule A4.6.19, the applicable maturity date must be the maturity of the longest date.

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

    • PIB A4.7 PIB A4.7 Credit RWA — Repurchase Agreements, Reverse Repurchase Agreements, Similar Transactions and Other Deferred Settlements

      • PIB A4.7.1

        This section applies to transactions in the Trading Book in relation to repurchase agreements, reverse repurchase agreements, similar transactions and deferred settlements.

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

      • PIB A4.7.2

        For repurchase agreements and reverse repurchase agreements the formula for Credit RWA, which must be calculated from T, is as follows: Credit RWA = E x CRW.

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

      • PIB A4.7.3

        For repurchase agreements: E = MV of the Securities sold − value of the Collateral or cash received.

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

      • PIB A4.7.4

        For reverse repurchase agreements: E = Amount paid or Collateral given − MV of the Securities received.

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

      • PIB A4.7.5

        If the E calculated is negative: Credit RWA = 0.

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

      • PIB A4.7.6

        The MV of Securities and the value of cash lodged must include accrued interest.

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

      • PIB A4.7.7

        The MV of Securities and the value of Collateral under PIB A4.7.3 to PIB A4.7.6 should be calculated in accordance with the Credit Risk mitigation provisions set out in PIB section 4.13.

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

      • PIB A4.7.8

        For deferred settlement purchases and sales transactions over the spot period: Credit RWA = 0.

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

      • PIB A4.7.9

        The 'spot period' means the shortest time between T and:

        (a) the contractual settlement date;
        (b) the normal local market settlement date; and
        (c) T + five business days.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.7.10

        For deferred settlement purchases and sales transactions with a contractual settlement date after the spot period as set out above but less than T + five business days:

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

      • PIB A4.7.11

        Credit RWA for deferred settlement transactions = E x CRW

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

      • PIB A4.7.12 PIB A4.7.12

        For deferred settlement purchases and sales transactions with a contractual settlement date exceeding T + five business days: Credit RWA for deferred settlement transactions = E x CRW x the appropriate multiplier from the table below:

        Number of business days calculated from T Percentages used for calculation of CRCOM on deferred settlement transactions
        6–30 5
        31–45 7.5
        46 or more 10
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.7.12 Guidance

          Credit RWA for deferred settlement transactions applies even if the deferred settlement contract is not overdue.

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

    • PIB A4.8 PIB A4.8 Credit RWA — Other Trading Book Transactions

      • PIB A4.8.1 PIB A4.8.1

        For Counterparty Exposures in the Trading Book not covered by sections PIB A4.6 and PIB A4.7, the following formula applies: Credit RWA = E x CRW.

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

        • PIB A4.8.1 Guidance

          Examples include Counterparty Exposures in relation to exchange-traded Derivatives, unpaid margin requirements, Trading Book qualifying deposits, and fees and interest.

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

      • PIB A4.8.2

        Where a Counterparty has not fully paid a margin requirement on a Derivative transaction listed on an exchange or cleared through a clearing house: E = the shortfall.

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

      • PIB A4.8.3

        Where an Authorised Firm sells or writes an Option to a Counterparty or buys an Option on behalf of a Counterparty and the Counterparty has not paid the full Option premium: E = the uncovered premium on the transaction.

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

      • PIB A4.8.4

        Where a Counterparty has not fully met amounts owed to an Authorised Firm arising out of losses on closed-out Derivative transactions or has not fully settled amounts owed in respect of periodic or final settlement of transactions: E = the unpaid loss.

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

    • PIB A4.9 PIB A4.9 Exposures to Central Counterparties (CCPs)

      • PIB A4.9.1

        An Authorised Firm may determine the Exposure value of a Credit Risk Exposure outstanding with a CCP in accordance with PIB A4.9.2, provided that the CCP's Counterparty Credit Risk Exposure with all participants in its arrangements are fully collateralised on a daily basis and the CCP is a qualifying CCP.

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

      • PIB A4.9.2

        An Authorised Firm may attribute an Exposure value of zero, for purposes of calculating the CRCOM to Derivative contracts and deferred settlement transactions, or to other Exposures arising in respect of those contracts or transactions (excluding an Exposure arising from Collateral held with CCPs as part of its default fund) where such Exposures are outstanding with a CCP and have not been rejected by the CCP.

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

      • PIB A4.9.3

        An Authorised Firm which purchases Credit Derivative protection against a Non-Trading Book Exposure or against a Counterparty Credit Risk Exposure, must compute Market Risk Capital Requirements for the hedged asset in accordance with the relevant Rules in PIB chapter 5.

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

      • PIB A4.9.4

        An Authorised Firm must assign an Exposure value of zero for purposes of determination of CRCOM, for credit default swaps sold by it, where such credit default swaps are treated as credit protection provided by the Authorised Firm and subject to a Capital Requirement for Credit Risk for the full amount.

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

      • Credit Default Products

        • PIB A4.9.5

          (1) The Protection Buyer relies on the Protection Seller to pay the Credit Event Payment if a Credit Event occurs, and therefore must compute Credit RWAs for the Counterparty Risk involved.
          (2) The Protection Seller is exposed to the Protection Buyer only if there are premium or interest rate-related payments outstanding.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.9.6

          In the case of Total Return Swaps, since each party relies on the other for payment, each party must compute Credit RWAs.

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

        • PIB A4.9.7

          No Credit RWA applies to credit-linked notes unless a coupon or interest payment is outstanding.

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

        • PIB A4.9.8

          1) An Authorised Firm shall determine the Exposure value for clearing Exposures to non-qualifying CCPs as the amount in the table below:
          Type of Clearing Exposure Exposure Amount
          Segregated initial margin Nil
          Non-segregated initial margin Nominal amount of initial margin posted
          Pre-funded default fund contributions Nominal amount of the funded contribution
          Unfunded default fund contributions Nil
          Equity stakes Nominal amount
          (2) For the purposes of (1), a “non-qualifying CCP” is a CCP that does not meet the criteria set out in the definition of a Qualifying CCP in PIB Rule 1.2.1.
          Derived from DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

    • PIB A4.10 PIB A4.10 Securitisation

      • PIB A4.10.1 PIB A4.10.1

        An Authorised Firm which is an Originator or a Sponsor of a Traditional Securitisation may exclude securitised Exposures from the calculation of Credit RWA amounts only if all of the following conditions have been complied with:

        (a) except as provided in (g), (i) and (k), significant Credit Risk associated with the securitised Exposures has been transferred from the Originator to third parties;
        (b) the Authorised Firm does not maintain effective or indirect control over the underlying Exposures;
        (c) the assets are legally isolated from the Authorised Firm in order to ensure the assets are beyond the reach of the Authorised Firm in the event of bankruptcy or receivership;
        (d) the Securities issued are not the obligations of the Authorised Firm;
        (e) the Securities are issued pursuant to the securitisation by an SPE and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction;
        (f) where a securitisation includes a Clean-Up Call, Clean-Up Calls must satisfy the conditions set out in PIB Rule A4.10.3.
        (g) the documentation of the securitisation does not contain any clauses that:
        (i) require the Authorised Firm systematically to alter the underlying Exposures such that the pool's weighted average credit quality is improved unless this is achieved by selling Exposures to independent and unaffiliated third parties which are not Connected to the Authorised Firm or Related Persons of the Authorised Firm in accordance with PIB Rule 4.4.6 at market prices;
        (ii) allow for increases in a retained First Loss Position or Credit Enhancement provided by the Authorised Firm after the securitisation's inception;
        (iii) other than step-up features incorporated in relation to the underlying Exposures of the securitisation, increase the yield payable to parties other than the Authorised Firm, such as investors and third-party providers of Credit Enhancements, in response to deterioration in the credit quality of the underlying Exposures in the pool; or
        (iv) other than Clean-Up Calls, oblige the Authorised Firm to repurchase any of the underlying Exposures, at any time, except where that obligation arises from the exercise of a representation or warranty given by the Authorised Firm. The Authorised Firm may give a representation or warranty solely in respect of the nature or existing state of facts of any underlying Exposure, that is capable of being verified, at the time of its transfer.
        (h) the transfer of the underlying Exposures or the transfer of risk through sub-participation does not contravene the terms and conditions of any underlying agreement in respect of the underlying Exposures and where applicable, all the necessary consents for the transfer or sub-participation have been obtained;
        (i) the documentation of the securitisation specifies that, if cash flows relating to the underlying Exposures are rescheduled or renegotiated, the SPE to which the Exposures have been transferred and not the Authorised Firm, would be subject to the rescheduled or renegotiated terms;
        (j) the Authorised Firm receives a fixed amount of consideration for the underlying Exposures;
        (k) the Authorised Firm holds not more than 20% of the aggregate original amount of all Securities issued by the SPE, except where such holdings comprise entirely of Securities that have a Credit Quality Grade of 1 as set out in Rules in sections PIB 4.11 and PIB 4.12, and all transactions with the SPE are conducted at arm's length and on market terms and conditions;
        (l) where the assets relate to the Islamic Financial Business of an Authorised Firm, a written confirmation from the appointed Shari'a Supervisory Board that the securitisation complies with Shari'a; and
        (m) each of the points (a) to (l) must be evidenced and confirmed by a legal opinion from a qualified legal counsel.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.10.1 Guidance

          1. An Authorised Firm is deemed to have effective control over the transferred Exposures if :
          a. it is able to repurchase from the transferee the previously transferred Exposures in order to realise their benefits; or
          b. it is obligated to retain the risk of the transferred Exposures.
          2. In this regard, an Authorised Firm acting as a Servicer in respect of the transferred Exposures will not necessarily constitute effective control of the Exposures.
          3. In respect of PIB Rule A4.10.1(j), the amount of consideration received in the form of a fixed amount of Securities in the SPE would generally be regarded as meeting this requirement if the transaction is conducted at arm's length and on market terms and conditions. Also, this requirement does not preclude excess cash from being channelled to the Authorised Firm after all claims connected with the Securities issued by the SPE have been paid out.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.10.2 PIB A4.10.2

        An Authorised Firm which is an Originator or a Sponsor of a Synthetic Securitisation may recognise the credit protection obtained through the Synthetic Securitisation in its calculation of Credit RWA amounts only if all of the following conditions have been complied with:

        (a) significant Credit Risk associated with the underlying Exposures has been transferred from the Originator to third parties;
        (b) the instrument used to transfer the underlying Credit Risks must not contain terms or conditions that limit in any way the amount of Credit Risk transferred, including, but not limited to, clauses that:
        (i) materially limit the credit protection or Credit Risk transference (e.g. significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs or those that allow for the termination of the protection due to deterioration in the credit quality of the underlying Exposures);
        (ii) require the Authorised Firm to alter the underlying Exposures to improve the weighted average credit quality of the pool;
        (iii) increase the cost of credit protection to the Authorised Firm in response to deterioration in the credit quality of the underlying Exposures;
        (iv) increase the yield payable to parties other than the Authorised Firm, such as investors and third-party providers of Credit Enhancements, in response to a deterioration in the credit quality of the underlying Exposures; or
        (v) provide for increases in a retained First Loss Position or Credit Enhancement provided by the originating bank after the transaction's inception.
        (c) an Authorised Firm must provide an external legal opinion from a qualified legal counsel that confirms each of the points (i-v) and the enforceability of the contracts in all relevant jurisdictions;
        (d) where the assets relate to the Islamic Financial Business of an Authorised Firm, a written confirmation from the appointed Shari'a Supervisory Board that the securitisation complies with Shari'a;
        (e) where the securitisation includes a Clean-Up Call it must meet the requirements of PIB Rule A4.10.3;
        (f) in the case where the risks associated with the underlying Exposures are transferred to an SPE:
        (i) the Securities issued by the SPE are not obligations of the Authorised Firm;
        (ii) the holders of the beneficial interests in that SPE have the right to pledge or exchange their interests without restriction; and
        (iii) the Authorised Firm holds not more than 20% of the aggregate original amount of all Securities issued by the SPE, except where such holdings consist entirely of Securities that have a Credit Quality Grade of 1 in accordance with Rules in sections PIB 4.11 and PIB 4.12, and all transactions with the SPE are conducted at arm's length and on market terms and conditions;
        (g) the Authorised Firm has, on an on-going basis, a comprehensive understanding of the risk characteristics of its individual securitisation Exposures, whether on- or off-balance sheet, as well as the risk characteristics of the pools underlying its securitisation Exposures;
        (h) the Authorised Firm is able to access performance information on the underlying Exposures on an on-going basis in a timely manner. Such information may include, as appropriate, Exposure type, percentage of loans 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score or other measures of creditworthiness, average loan-to-value ratio, and industry and geographic diversification. For Re-securitisations, the Authorised Firm should have information not only on the underlying securitisation tranches, such as the Issuers' names and credit quality, but also on the characteristics and performance of the pools underlying the securitisation tranches; and
        (i) the Authorised Firm has a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the transaction, such as the contractual waterfall and waterfall-related triggers, Credit Enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.10.2 Guidance

          In relation to Rules PIB A4.10.1 and PIB A4.10.2, significant Credit Risk will be considered to have been transferred by the Originator of a securitisation if:

          a. the RWA amounts of the mezzanine securitisation positions held by the Originator in the securitisation do not exceed 50% of the RWA amounts of all mezzanine securitisation positions existing in this securitisation; and
          b. where there are no mezzanine securitisation positions in a given securitisation and the Originator can demonstrate that the Exposure value of the securitisation positions that would be subject to deduction from Capital Resources or a 1250% risk weight exceeds a reasonable estimate of the expected loss on the Securitised Exposures by a substantial margin, the Originator does not hold more than 20% of the Exposures values of the securitisation positions that would be subject to deduction from Capital Resources or a 1250% risk weight.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Operational Requirements for the Treatment of Clean-Up Calls

        • PIB A4.10.3

          Where a Clean-Up Call is included within a securitisation, the Authorised Firm which has the ability to exercise the Clean-Up Call must ensure that:

          (a) the exercise of the Clean-Up Call must not be mandatory, in form or substance;
          (b) the Clean-Up Call must not be structured to avoid allocating losses to Credit Enhancements, or positions held by investors or in any way structured to provide Credit Enhancement; and
          (c) the Clean-Up Call must only be exercisable when 10% or less of the original underlying Exposures or Securities issued in that securitisation remains, or in the case of a Synthetic Securitisation, when 10% or less of the original reference portfolio value remains.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.10.4

          Where the conditions listed in PIB Rule A4.10.3 are not met the Authorised Firm must hold capital against the Exposures as follows:

          (a) for a Traditional Securitisation the underlying Exposures must be treated as if they had not been securitised;
          (b) Authorised Firms must not include any gain-on-sale in any element or component of their Capital Resources;
          (c) for Synthetic Securitisations, the Authorised Firm must hold capital against the entire amount of securitised Exposures; and
          (d) where a Synthetic Securitisation incorporates a call that is not a Clean-Up Call, the Authorised Firm must treat the transaction in accordance with the relevant Credit Risk mitigation techniques in PIB section 4.13.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.10.5

          An Authorised Firm must treat a currency mismatch or a maturity mismatch between the underlying Exposure being hedged and the Credit Risk mitigation obtained through the Synthetic Securitisation in accordance with Rules in sections PIB 4.13 and PIB A4.3.

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

    • PIB A4.11 PIB A4.11 Concentration Risk

      • Exempt Exposures

        • PIB A4.11.1 PIB A4.11.1

          (1) An Authorised Firm may treat the following Exposures as exempt from the Concentration Risk limits in PIB chapter 4 if they are to Counterparties not Connected to the Authorised Firm:
          (a) asset items or Exposures constituting claims on central governments, Central Banks and Public Sector Entities (PSEs) which receive a Credit Quality Grade rating 1 or 2 in accordance with PIB Rule 4.12.4;
          (b) asset items or Exposures constituting claims on international organisations and multi-lateral development banks (MDBs) which receive a 0% (Credit Quality Grade rating of 1) risk weight as set out at PIB Rule 4.12.7;
          (c) asset items or Exposures carrying the explicit guarantees of either (a) or (b) where the claims on the entity providing the guarantee would receive a 0% weighting (Credit Quality Grade rating of 1);
          (d) Exposures for which the Authorised Firm has Collateral in the form of cash deposits or certificates of deposit, including certificates of deposit issued by the Authorised Firm, held by the Authorised Firm, or held by the Authorised Firm's Parent Regulated Financial Institution or a Subsidiary of the Authorised Firm, but only if:
          (i) the Authorised Firm and its Parent Regulated Financial Institution or the Subsidiary of the Authorised Firm concerned are subject to consolidated supervision;
          (ii) the enforceability requirements in PIB section 4.13 (Credit Risk mitigation) are met; and
          (iii) material holdings in Regulated Financial Institutions and other Exposures which have been deducted from an Authorised Firm's Tier 1 Capital as required in PIB chapter 3.
          (2) If an Authorised Firm obtains credit protection relating to an exempt Exposure under (1)(a), the Authorised Firm must nevertheless apply the Large Exposure limits to the Exposure to the credit protection provider, notwithstanding that the original Exposure is exempt.
          (3) An Authorised Firm must report Exposures which are exempt under (1)(a), (b) and (c) to the DFSA.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB A4.11.1 Guidance

            1. In order to be applicable under (c) the guarantees must meet the requirements of PIB section 4.13.9 in relation to Credit Risk mitigation.
            2. An Authorised Firm can only treat Exposures as Collateralised provided the conditions of Rules PIB 4.13.5 to PIB 4.13.8 (relating to Credit Risk mitigation) are met. Item (d) also includes cash received under a credit linked note issued by the Authorised Firm and loans and deposits of a Counterparty to or with the Authorised Firm which are subject to an on balance sheet Netting agreement recognised under PIB section 4.13 (Credit Risk mitigation).
            3. The DFSA may consider a waiver for other sovereign Exposures where there is a local regulatory requirement to hold assets with a national regulatory authority. Authorised Firms will be required to apply for a waiver of the Large Exposure requirements in this regard and will be considered by the DFSA on a case by case basis.
            4. The DFSA may, where it considers it appropriate, allow two or more Exposures to a sovereign not to be treated as connected or related if the sole reason for linking them is being controlled or economically dependent on the sovereign (including eligible PSEs). An eligible PSE is a PSE referred to in PIB Rule A4.11.1(a).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Added] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

        • PIB A4.11.2

          Where Exposures to a client are guaranteed by a third party, or secured by Collateral issued by a third party, an Authorised Firm may:

          (a) provided the Collateral meets the requirements of PIB section 4.13 (Credit Risk mitigation), and would be assigned a lower risk weight under PIB section 4.12, treat that portion of the Exposure which is secured by Collateral as an Exposure to the third party. An Authorised Firm must treat the portion secured by Collateral as having being incurred to the third party providing the Collateral rather than to the Client for the purposes of considering the limits as set out at PIB Rule 4.15.5; or
          (b) provided the guarantee meets the requirements of PIB section 4.13 (Credit Risk mitigation), and would be assigned a lower risk weight under PIB section 4.12, treat that portion of the Exposure which is guaranteed as an Exposure to the third party. An Authorised Firm must treat the portion guaranteed as having being incurred to the third party rather than to the Client for the purposes of considering the limits as set out at PIB Rule 4.15.5. When considering the guarantee there must not be any maturity mismatch between the guarantee and the underlying Exposure.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.3

          If an Exposure is partially guaranteed by an Authorised Firm's Parent Regulated Financial Institution, and would be assigned a lower risk weight under PIB section 4.12, only that part of the Exposure subject to the guarantee is exempt from the Concentration Risk limits in PIB Rule 4.15.5. When considering the treatment of this Rule an Authorised Firm may also consider the exemptions permitted under PIB Rule 4.15.18 relating to parental guarantees.

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

      • Identification of Counterparties

        • PIB A4.11.4 PIB A4.11.4

          When calculating the Exposures of an Authorised Firm, the Authorised Firm must include Trading Book Exposures and Non-Trading Book Exposures to:

          (a) an individual Counterparty;
          (b) group of Closely Related Counterparties;
          (c) Connected Counterparties; and,
          (d) Transactions, schemes or Funds.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

          • PIB A4.11.4 Guidance

            1. An individual Counterparty is a natural or legal person, which include governments, local authorities, public sector enterprises (PSEs), trusts, corporations, unincorporated businesses and non-profit-making bodies.
            2. Examples of a Counterparty include:
            a. the customer or borrower;
            b. where the Authorised Firm is providing a guarantee, the person guaranteed;
            c. for a Derivatives contract, the person with whom the contract was made;
            d. for most exchange-traded contracts involving a central clearing mechanism, that central clearing mechanism; and
            e. where a bill held by an Authorised Firm has been accepted by another Financial Institution, the acceptor.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Group of Closely Related Counterparties

        • PIB A4.11.5

          (1) For Concentration Risk purposes, Persons are Closely Related if:
          (a) the insolvency or default of one of them is likely to be associated with the insolvency or default of the others;
          (b) it would be prudent when assessing the financial condition or creditworthiness of one to consider that of the others;
          (c) there is, or is likely to be, a close relationship between the financial performance of those Persons; or
          (d) they are assessed to be economically interdependent.
          (2) Persons are to be assessed as being economically interdependent for the purposes of (1)(d) where one or more of the following factors are present:
          (a) 50% or more of the annual receipts or expenditures of one is derived from transactions with the other;
          (b) a guarantee issued by one in favour of the other party is likely to result in the provider default if called;
          (c) significant output is sold to the other party and an alternative buyer is not easily found;
          (d) single source of funds to repay loans for both parties with no alternative; or
          (e) common reliance on the same funding provider that is hard to replace.
          (3) An Authorised Firm need not assess economic interdependence under (2) for a transaction where the sum of all Exposures to one individual counterparty is less than 5% of the Authorised Firm’s T1 Capital.
          (4) Persons who are Closely Related to each other are also Connected with each other.
          (5) The requirement to aggregate Exposures where Persons are Closely Related does not apply where an Authorised Firm can demonstrate to the DFSA that it is unlikely that Persons who are Closely Related will default at the same time and the DFSA has, by notice in writing, disapplied the requirement.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

        • PIB A4.11.6 PIB A4.11.6

          (1) A single group of Closely Related Counterparties means, in relation to an Authorised Firm, all the Persons to which the Authorised Firm has an Exposure and which are Closely Related to each other.
          (2) An Authorised Firm must treat two or more Persons as falling within a group of Closely Related Counterparties if the Authorised Firm has Exposures to them all and any loss to the Authorised Firm on any of the Exposures to one is likely to be associated with a loss to the Authorised Firm with respect to at least one Exposure to each of the others.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.11.6 Guidance:

            Two or more Counterparties between whom there is no relationship of control as described in Rules PIB A4.11.5 and PIB A4.11.6 will be regarded as constituting a single risk if they are so interconnected that, if one of them were to experience financial problems, in particular funding or repayment difficulties, the other or all of the others would also be likely to encounter funding or repayment difficulties.

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

      • Connected Counterparties

        • PIB A4.11.7 PIB A4.11.7

          (1) For Concentration Risk purposes, and in relation to a Person, a Connected Counterparty means another Person to whom the first Person has an Exposure and who fulfils one of the following conditions:

          (a) he is Connected to the first Person;
          (b) he is an Associate of the first Person;
          (c) the same Persons significantly influence the Governing Body or senior management of each of them;
          (d) one of those Persons has an Exposure to the other that was not incurred for the clear commercial advantage of both of them and which is not on arm's length terms; or
          (e) one of those Persons:
          (i) has influence over the appointment or dismissal of the Board or senior management of the other party;
          (ii) is entitled to exercise, or controls the exercise of 50% or more of the voting rights in the other party including through voting agreements; or
          (iii) has effective control over the other party under the criteria adopted by the International Financial Reporting Standards.

          (2) A Person is not to be treated as a Connected Counterparty under (1), where an Authorised Firm can satisfy the DFSA that effective governance and controls are in place to mitigate risks resulting from effective control of one Person by the other and the DFSA has, by notice in writing, specified that they are not to be so treated.

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

          • PIB A4.11.7 Guidance:

            A group of Connected Counterparties would be considered to be such where the entities share the same ultimate owner even though they may not be formally structured as a Group.

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

      • Exposures to Transactions, Schemes or Funds

        • PIB A4.11.8 PIB A4.11.8

          (1) Where an Authorised Firm has an Exposure to a transaction, scheme, Fund, or other Exposure to a pool of underlying Exposures, the Authorised Firm must assess the Exposure to determine whether the Exposure is to a group of Closely Related Counterparties in its economic substance.

          (2) Where the Exposure is to a group and the Authorised Firm can demonstrate that the Exposure amount to each underlying asset of the structure is less than 0.25% of its Tier 1 Capital, the Authorised Firm may assign the Exposure amount to the structure itself.

          (3) An Authorised Firm need not look through a structure for the purposes of (2) if the Authorised Firm can demonstrate that its Exposure to each asset in the structure is less than 0.25% of its Tier 1 Capital.

          (4) Where the Exposure is to a group and the Authorised Firm can demonstrate that the Exposure amount to each underlying asset of the structure is equal to or exceeds 0.25% of its Tier 1 Capital, the Authorised Firm must look through the structure and identify each underlying asset and add that Exposure to the other Exposures of the same counterparty.

          (5) If an Authorised Firm looks through the structure to identify underlying assets and one or more underlying assets cannot be identified, the Authorised Firm must aggregate and assign that Exposure to a single "unknown customer" to which the Large Exposure limits apply.

          (6) If the Exposure to the underlying assets in a structure depends on the hierarchy of loss distribution to investors in the event of the winding up of the structure, an Authorised Firm must treat its Exposure to the structure:

          (a) as the pro rata share of the firm’s Exposure multiplied by the value of the underlying asset, where all investors rank equally; or
          (b) as the pro rata share of the firm’s investment in the structure multiplied by the lower of the tranche value or the nominal value of the underlying assets in the structure, where the seniority differs.

          (7) An Authorised Firm must aggregate its Exposures to any additional risks inherent in the structure itself, if that would result in Exposures to the same third party.

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

          • PIB A4.11.8 Guidance:

            1. When considering this Rule the Authorised Firm should consider the following factors:
            a. the structure, independence and control of the transaction, including governance arrangements;
            b. the inter relatedness of the underlying Exposures;
            c. beneficial owners of the underlying Exposures and whether they could be deemed Connected or Closely Related; and
            d. whether the transactions are conducted on an arm's length basis.
            2. An Authorised Firm should look through the structure to determine whether there are any Counterparties or Exposures that should be considered a Concentration Risk.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Connected Counterparty Exemptions

        • PIB A4.11.9

          (1) This Rule applies to an Authorised Firm in Category 2 and 3A.
          (2) An Authorised Firm may treat as exempt from the Concentration Risk limits in PIB chapter 4 an Exposure to a Counterparty or Counterparties Connected to the Authorised Firm if all of the following conditions are met:
          (a) the Authorised Firm has given the DFSA written notice one month in advance of its intention to use the exemption and explained how it will ensure that it will still meet the Concentration Risk limits on a continuing basis when using the exemption;
          (b) the total amount of the Exposures that an Authorised Firm is treating as exempt under this Rule does not exceed 50% of the Authorised Firm's Tier 1 Capital;
          (c) the Authorised Firm makes and retains a record that identifies each Exposure it has treated in this way;
          (d) the Authorised Firm is subject to consolidated supervision;
          (e) the Counterparty is:
          (i) an Authorised Firm which is the subject of consolidated supervision; or
          (ii) a member of the Authorised Firm's Group which is the subject of consolidated supervision to the satisfaction of the DFSA; and
          (f) the Exposure satisfies one or more of conditions (i) to (iii):
          (i) it is a loan made by the Authorised Firm with a maturity of one year or less in the course of the Authorised Firm carrying on a treasury role for other members of its Group;
          (ii) it is a loan to the Parent of the Authorised Firm made in the course of a business carried on by the Authorised Firm of lending to its parent cash that is surplus to the needs of the Authorised Firm, provided that the amount of that surplus fluctuates regularly; or
          (iii) it arises from the Authorised Firm or a Counterparty Connected to the Authorised Firm operating a central risk management function for Exposures arising from Derivatives contracts.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • Measuring Exposure to Counterparties and Issuers

        • PIB A4.11.10

          Rules PIB A4.11.12 to PIB A4.11.28 apply to both Non-Trading Book and Trading Book Exposures.

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

        • PIB A4.11.11

          When calculating an Exposure, an Authorised Firm must include accrued interest and dividends due.

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

        • PIB A4.11.12

          An Authorised Firm must not offset Non-Trading Book and Trading Book Exposures.

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

        • PIB A4.11.13

          A net short position is not an Exposure for the purposes of Concentration Risk.

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

        • PIB A4.11.14

          (1) Subject to (2), the value of an Authorised Firm's Exposure to a Counterparty, whether in its Non-Trading Book or its Trading Book, is the amount at risk calculated in accordance with PIB chapter 4.
          (2) For the purposes of calculating the value of an Authorised Firm's Exposure to a Counterparty under (1), the CCF factors taken into account under PIB A4.2 are subject to a minimum floor of 10%.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

      • Exposures to Issuers

        • PIB A4.11.15

          An Authorised Firm must calculate the value of an Exposure to the Issuer of a Security which is held in the Authorised Firm's Non-Trading Book as the sum of the excess, where positive, of the book value of all long positions over all short positions (the net long position), for each identical instrument issued by that Issuer.

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

        • PIB A4.11.16

          For the purposes of PIB Rule A4.11.15, short positions in one Security may be used to offset long positions in a non-identical Security issued by the same Issuer if:

          (a) both Securities are denominated in the same currency; and
          (b) where both Securities are:
          (i) fixed rate or index-linked, and are within the same residual maturity time band; or
          (ii) floating rate.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.17

          An Authorised Firm must calculate the value of an Exposure to the Issuer of a Security or a credit derivative used as a hedge that is held in the Authorised Firm's Trading Book by calculating the excess of the current market value of all long positions over all short positions in all the Securities or credit derivatives issued by that Issuer, based on the seniority of those Securities or credit derivatives in the liquidation of the Issuer.

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

        • PIB A4.11.18

          An Authorised Firm must not offset an Exposure to one Issuer against an Exposure to another even where the Issuers are in a group of Closely Related Counterparties.

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

        • PIB A4.11.19

          An Authorised Firm must include as a long position a commitment by it to buy:

          (a) a debt Security or an equity at a future date; and
          (b) under a note issuance facility, at the request of the Issuer, a Security that is unsold on the issue date.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.20

          An Authorised Firm must include as a short position a commitment by it to sell a debt Security or equity at a future date.

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

        • PIB A4.11.21 PIB A4.11.21

          Where the equity leg of an equity swap is based on the change in value of an individual equity, it is treated as an Exposure to the Issuer of the equity.

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

          • PIB A4.11.21 Guidance

            An interest rate leg of an equity swap, or interest rate or currency swap does not generate an Exposure to an Issuer.

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

        • PIB A4.11.22

          An Authorised Firm must, when determining its Exposure to an Issuer arising from an Option, use an Exposure value based on the level of change in the price that will result from the default of the underlying instrument.

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

        • PIB A4.11.23

          (1) An Authorised Firm must treat the value of:
          (a) a call Option as equal to market value; and
          (b) a put Option as equal to the strike price minus market value.
          (2) An Authorised Firm must aggregate the resulting option Exposures to each underlying counterparty and if there is a negative net Exposure after aggregation of all option Exposures, the option Exposure must be set to nil.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RMI293/2021 (Made 24th February 2021). [VER38/04-21]

        • PIB A4.11.24 PIB A4.11.24

          An Authorised Firm must, for the purposes of Concentration Risk, treat an Exposure to an Issuer arising from an index or basket of debt Securities or a non-broad-based equity index or basket, as a series of Exposures to the Issuers of the underlying instruments or equities in accordance with the procedures in PIB chapter 4.

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

          • PIB A4.11.24 Guidance

            Broadly based equity indices should not be broken down into their constituent stocks. A position related to a broadly based equity index does not generate an Exposure to any Issuer.

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

        • PIB A4.11.25

          An Authorised Firm which receives cash on a repurchase agreement must treat the cash as if it is on its balance sheet and in accordance with sections PIB 4.9 and PIB 4.13. Any Collateral received against repurchase agreements or Securities and commodities borrowing must also be treated as a balance sheet item under sections PIB 4.9 and PIB 4.13.

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

        • PIB A4.11.26

          An Authorised Firm must treat a reverse repurchase agreement or Securities and commodities lending in its Non-Trading Book as a collateralised loan and the Collateral it holds as an asset, provided that the Collateral is eligible financial Collateral as defined in PIB Rule 4.13.5. If the Collateral is not such an eligible financial Collateral, the Authorised Firm must treat the transaction as an unsecured loan to the Counterparty.

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

        • PIB A4.11.27

          An Authorised Firm with repurchase agreements and reverse repurchase agreements in its Trading Book has an Exposure to:

          (a) the Issuer of the Security it has sold in a repurchase agreement; and
          (b) the Counterparty where the Securities or cash given by the Authorised Firm exceed the Securities or cash it receives (i.e. there is a net margin given by the Authorised Firm) in a repurchase agreement or reverse repurchase agreement.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.28

          An Authorised Firm must calculate in accordance with PIB section 5.10 an Exposure to the Issuer arising from the Underwriting or sub-underwriting of a new Issue of Securities.

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

    • PIB A4.12 PIB A4.12 The Simplified Approach for Category 2 and 3A Firms

      • PIB A4.12.1

        This section applies only to an Authorised Firm in Category 2 or 3A for the purposes of PIB section 4.7.

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

      • PIB A4.12.2

        An Authorised Firm that applies the Simplified Approach must comply with the requirements of PIB chapter 4 with the variations as prescribed below:

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

      • Risk Weights

        • Central Government and Central Bank Asset Class

          • PIB A4.12.3

            Under the Simplified Approach, Rules PIB 4.12.4 to PIB 4.12.5 are replaced by Rules PIB A4.12.4 to PIB A4.12.6.

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

          • PIB A4.12.4 PIB A4.12.4

            Subject to Rules PIB A4.12.5 and PIB A4.12.6, an Authorised Firm must risk-weight any CR Exposure in the central government and Central Bank asset class on the basis of the consensus country risk scores of export credit agencies (referred to in this section as "ECA") participating in the OECD's "Arrangement on Officially Supported Export Credits" and in accordance with the table below.

            Risk weights for the central government and Central Bank asset class

            ECA Risk Scores 0–1 2 3 4 to 6 7
            Risk Weights 0% 20% 50% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB A4.12.4 Guidance

              The consensus country risk classification for the purpose of the "Arrangement on Officially Supported Export Credits" is published by the OECD. At the time of making of these Rules, the classification was available on the OECD's website (http://www.oecd.org) in the Export Credit Arrangement web-page of the Trade Directorate.

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

          • PIB A4.12.5

            An Authorised Firm must apply a 0% risk weight to any CR Exposure to any central government or any Central Bank of a GCC member country, which is denominated in the domestic currency, and funded in the domestic currency of that GCC member country.

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

          • PIB A4.12.6

            For any CR Exposure to any other central government or Central Bank which is denominated and funded in the local currency of that jurisdiction, an Authorised Firm may apply such risk weights as may be specified by the banking regulator of that jurisdiction.

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

        • Bank Asset class

          • PIB A4.12.7

            Under the Simplified Approach, Rules PIB 4.12.10 to PIB 4.12.12 are replaced by the following PIB Rule A4.12.8.

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

          • PIB A4.12.8

            An Authorised Firm must risk-weight any CR Exposure in the bank asset class on the basis of the consensus ECA country risk scores as referred to in PIB A4.12.4 for the jurisdictions in which they are incorporated, in accordance with the following table:

            CRWs for the bank asset class

            ECA Risk Scores 0–1 2 3 4 to 6 7
            Risk Weights 20% 50% 100% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Corporate Asset Class

          • PIB A4.12.9

            Under the Simplified Approach, Rules PIB 4.12.13 to PIB 4.12.15 are replaced by the following PIB Rule A4.12.10.

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

          • PIB A4.12.10

            An Authorised Firm must apply a 100% risk weight to any CR Exposure in the corporate asset class.

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

        • Credit Risk Mitigation — Collateral

          • PIB A4.12.11

            Under the Simplified Approach, Rules PIB 4.13.5 to PIB 4.13.7 are replaced by the following Rules PIB A4.12.12 to PIB A4.12.14.

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

          • PIB A4.12.12

            An Authorised Firm may only use the financial Collateral Simplified Approach (FCSA) in its treatment of recognised Collateral for the purposes of calculating the Credit RWA for its Exposures booked in its Non-Trading Book.

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

          • PIB A4.12.13

            (1) For an Authorised Firm using the FCSA, eligible financial Collateral comprises:
            (a) cash (as well as certificates of deposit or other similar instruments issued by the Authorised Firm) on deposit with the Authorised Firm;
            (b) gold;
            (c) any debt securities issued by sovereigns (including a central government or Central Bank) of a jurisdiction that that has an ECA country risk score of 4 or better; and
            (d) any debt securities issued by a PSE that is treated as a sovereign and is of a jurisdiction that has an ECA country risk score of 4 or better.
            (2) Cash-funded credit-linked notes issued by an Authorised Firm against Exposures in the Non-Trading Book which fulfil the criteria for eligible Credit Derivatives must be treated as cash collateralised transactions.
            (3) Cash, mentioned in (1)(a) includes cash on deposit, certificates of deposit or other similar instruments issued by the Authorised Firm that are held as Collateral at a third-party bank in a non-custodial arrangement and that are pledged or assigned to the Authorised Firm. This is subject to the pledge or assignment being unconditional and irrevocable. Under the FCSA, the risk weight to be applied to the Exposure covered by such Collateral must be the risk weight of the third-party bank.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.12.14

            In the case of any Counterparty Risk Exposures in Rules PIB A4.12.12 and PIB A4.12.13, arising from an SFT which is included in the Trading Book, eligible financial Collateral includes all instruments which an Authorised Firm may include in its Trading Book.

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

        • Credit Risk Mitigation — Guarantees

          • PIB A4.12.15

            Under the Simplified Approach, Rules PIB 4.13.9 and PIB 4.13.10 are replaced by the following Rules PIB A4.12.16 to PIB A4.12.19.

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

          • PIB A4.12.16

            An Authorised Firm may recognise guarantees provided by the following eligible guarantors:

            (a) the Bank for International Settlements, the International Monetary Fund, the European Central Bank, and the European Commission;
            (b) the MDBs referred to in PIB Rule 4.12.8;
            (c) PSEs; and
            (d) other entities eligible for a CRW of 20% or better and with a lower risk weight than the Counterparty.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.12.17

            For the purpose of calculating the risk weight of a guaranteed Exposure, an Authorised Firm must assign the guaranteed portion the risk weight of the eligible guarantors. The uncovered portion of the Exposure must be assigned the risk weight of the underlying Counterparty.

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

          • PIB A4.12.18

            An Authorised Firm can apply a 0% risk weight to any portions of Exposures guaranteed by central governments or Central Banks of a GCC member country where the guarantee is denominated in the domestic currency of that country, and the Exposure is funded in that same domestic currency.

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

          • PIB A4.12.19

            An Authorised Firm must treat any materiality thresholds on payments below which no payment will be made in the event of loss as retained First Loss Positions and must deduct the full amount from its Capital Resources.

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