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  • 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]