Entire Section

  • 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]