PIB A4.11 PIB A4.11 Concentration Risk
PIB A4.11.1 PIB A4.11.1(1) An
Authorised Firmmay treat the following Exposuresas exempt from the Concentration Risklimits in PIB chapter 4 if they are to Counterpartiesnot Connectedto the Authorised Firm:(a) asset items or Exposuresconstituting claims on central governments, Central Banksand 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 Exposuresconstituting 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 Exposurescarrying 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) Exposuresfor which the Authorised Firmhas Collateralin 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 Institutionor a Subsidiaryof the Authorised Firm, but only if:(i) the Authorised Firmand its Parent Regulated Financial Institutionor the Subsidiaryof the Authorised Firmconcerned are subject to consolidated supervision;(2) If an Authorised Firmobtains credit protection relating to an exempt Exposure under (1)(a), the Authorised Firmmust nevertheless apply the Large Exposure limits to the Exposure to the credit protection provider, notwithstanding that the original Exposure is exempt.(3) An Authorised Firmmust report Exposureswhich are exempt under (1)(a), (b) and (c) to the DFSA.
PIB A4.11.1 Guidance1. In order to be applicable under (c) the guarantees must meet the requirements of PIB section 4.13.9 in relation to
Credit Riskmitigation.2. An Authorised Firmcan only treat Exposuresas Collateralisedprovided the conditions of Rules PIB 4.13.5 to PIB 4.13.8 (relating to Credit Riskmitigation) are met. Item (d) also includes cash received under a credit linked noteissued by the Authorised Firmand loans and deposits of a Counterpartyto or with the Authorised Firmwhich are subject to an on balance sheet Nettingagreement recognised under PIB section 4.13 ( Credit Riskmitigation).3. The DFSAmay consider a waiver for other sovereign Exposureswhere there is a local regulatory requirement to hold assets with a national regulatory authority. Authorised Firmswill be required to apply for a waiver of the Large Exposurerequirements in this regard and will be considered by the DFSAon 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).
Exposuresto a client are guaranteed by a third party, or secured by Collateralissued by a third party, an Authorised Firmmay:(a) provided the Collateralmeets the requirements of PIB section 4.13 ( Credit Riskmitigation), and would be assigned a lower risk weight under PIB section 4.12, treat that portion of the Exposurewhich is secured by Collateralas an Exposureto the third party. An Authorised Firmmust treat the portion secured by Collateralas having being incurred to the third party providing the Collateralrather than to the Clientfor 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 Riskmitigation), and would be assigned a lower risk weight under PIB section 4.12, treat that portion of the Exposurewhich is guaranteed as an Exposureto the third party. An Authorised Firmmust treat the portion guaranteed as having being incurred to the third party rather than to the Clientfor 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.
Exposureis 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 Exposuresubject to the guarantee is exempt from the Concentration Risklimits in PIB Rule 4.15.5. When considering the treatment of this Rulean Authorised Firmmay also consider the exemptions permitted under PIB Rule 4.15.18 relating to parental guarantees.
Identification of Counterparties
PIB A4.11.4 PIB A4.11.4
When calculating the
Exposuresof an Authorised Firm, the Authorised Firm must include Trading Book Exposuresand Non-Trading Book Exposuresto:(a) an individual Counterparty;(b) group of Closely Related Counterparties;(c) Connected Counterparties; and,(d) Transactions, schemes or Funds.
PIB A4.11.4 Guidance1. An individual
Counterpartyis 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 Counterpartyinclude:a. the customer or borrower;b. where the Authorised Firmis providing a guarantee, the person guaranteed;c. for a Derivativescontract, the person with whom the contract was made;d. for most exchange-traded contracts involving a central clearing mechanism, that central clearing mechanism; ande. where a bill held by an Authorised Firmhas been accepted by another Financial Institution, the acceptor.
Group of Closely Related Counterparties
PIB A4.11.5(1) For
Concentration Riskpurposes, Personsare Closely Relatedif:(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) Personsare 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 Firmneed 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) Personswho are Closely Relatedto each other are also Connectedwith each other.(5) The requirement to aggregate Exposures where Personsare Closely Related does not apply where an Authorised Firmcan demonstrate to the DFSA that it is unlikely that Personswho are Closely Related will default at the same time and the DFSA has, by notice in writing, disapplied the requirement.
PIB A4.11.6 PIB A4.11.6(1) A single group of
Closely Related Counterpartiesmeans, in relation to an Authorised Firm, all the Personsto which the Authorised Firmhas an Exposureand which are Closely Relatedto each other.(2) An Authorised Firmmust treat two or more Personsas falling within a group of Closely Related Counterpartiesif the Authorised Firmhas Exposuresto them all and any loss to the Authorised Firmon any of the Exposuresto one is likely to be associated with a loss to the Authorised Firmwith respect to at least one Exposureto each of the others.
PIB A4.11.6 Guidance:
Two or more
Counterpartiesbetween 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.
PIB A4.11.7 PIB A4.11.7
Concentration Riskpurposes, and in relation to a Person, a Connected Counterpartymeans another Personto whom the first Personhas an Exposureand who fulfils one of the following conditions:(a) he is Connectedto the first Person;(b) he is an Associateof the first Person;(c) the same Personssignificantly influence the Governing Bodyor senior management of each of them;(d) one of those Personshas an Exposureto 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.
Personis not to be treated as a Connected Counterpartyunder (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 Personby the other and the DFSA has, by notice in writing, specified that they are not to be so treated.
PIB A4.11.7 Guidance:
A group of
Connected Counterpartieswould be considered to be such where the entities share the same ultimate owner even though they may not be formally structured as a Group.
Exposures to Transactions, Schemes or Funds
PIB A4.11.8 PIB A4.11.8
(1) Where an
Authorised Firmhas an Exposureto a transaction, scheme, Fund, or other Exposureto a pool of underlying Exposures, the Authorised Firmmust assess the Exposureto determine whether the Exposureis to a group of Closely Related Counterpartiesin its economic substance.
(2) Where the
Exposureis to a group and the Authorised Firmcan demonstrate that the Exposureamount to each underlying asset of the structure is less than 0.25% of its Tier 1 Capital, the Authorised Firmmay assign the Exposureamount to the structure itself.
(3) An Authorised Firm need not look through a structure for the purposes of (2) if the
Authorised Firmcan demonstrate that its Exposureto each asset in the structure is less than 0.25% of its Tier 1 Capital.
(4) Where the
Exposureis to a group and the Authorised Firmcan demonstrate that the Exposureamount to each underlying asset of the structure is equal to or exceeds 0.25% of its Tier 1 Capital, the Authorised Firmmust look through the structure and identify each underlying asset and add that Exposureto the other Exposures of the same counterparty.
(5) If an
Authorised Firmlooks through the structure to identify underlying assets and one or more underlying assets cannot be identified, the Authorised Firmmust aggregate and assign that Exposureto a single "unknown customer" to which the Large Exposurelimits apply.
(6) If the
Exposureto 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 Firmmust treat its Exposure to the structure:(a) as the pro rata share of the firm’s Exposuremultiplied 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.
Authorised Firmmust aggregate its Exposures to any additional risks inherent in the structure itself, if that would result in Exposures to the same third party.
PIB A4.11.8 Guidance:1. When considering this
Rulethe Authorised Firmshould 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 Exposuresand whether they could be deemed Connectedor Closely Related; andd. whether the transactions are conducted on an arm's length basis.2. An Authorised Firmshould look through the structure to determine whether there are any Counterpartiesor Exposuresthat should be considered a Concentration Risk.
Connected Counterparty Exemptions
PIB A4.11.9(1) This Rule applies to an Authorised Firm in Category 2 and 3A.(2) An
Authorised Firmmay treat as exempt from the Concentration Risklimits in PIB chapter 4 an Exposureto a Counterpartyor Counterparties Connectedto the Authorised Firmif all of the following conditions are met:(a) the Authorised Firmhas given the DFSAwritten 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 Risklimits on a continuing basis when using the exemption;(b) the total amount of the Exposuresthat an Authorised Firmis treating as exempt under this Ruledoes not exceed 50% of the Authorised Firm'sTier 1 Capital;(c) the Authorised Firmmakes and retains a record that identifies each Exposureit has treated in this way;(d) the Authorised Firmis subject to consolidated supervision;(e) the Counterpartyis:(i) an Authorised Firmwhich is the subject of consolidated supervision; or(ii) a member of the Authorised Firm's Groupwhich is the subject of consolidated supervision to the satisfaction of the DFSA; and(f) the Exposuresatisfies one or more of conditions (i) to (iii):(i) it is a loan made by the Authorised Firmwith a maturity of one year or less in the course of the Authorised Firmcarrying on a treasury role for other members of its Group;(ii) it is a loan to the Parentof the Authorised Firmmade in the course of a business carried on by the Authorised Firmof 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 Firmor a Counterparty Connectedto the Authorised Firmoperating a central risk management function for Exposuresarising from Derivativescontracts.
Measuring Exposure to Counterparties and Issuers
When calculating an
Exposure, an Authorised Firmmust include accrued interest and dividends due.
Authorised Firmmust not offset Non-Trading Bookand Trading Book Exposures.
A net short position is not an
Exposurefor the purposes of Concentration Risk.
PIB A4.11.14(1) Subject to (2), the value of an
Authorised Firm's Exposureto a Counterparty, whether in its Non-Trading Bookor 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%.
Exposures to Issuers
Authorised Firmmust calculate the value of an Exposureto the Issuerof a Securitywhich is held in the Authorised Firm's Non-Trading Bookas 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.
For the purposes of PIB Rule A4.11.15, short positions in one
Securitymay be used to offset long positions in a non-identical Securityissued by the same Issuerif:(a) both Securitiesare denominated in the same currency; and(b) where both Securitiesare:(i) fixed rate or index-linked, and are within the same residual maturity time band; or(ii) floating rate.
Authorised Firmmust calculate the value of an Exposureto the Issuerof a Securityor a credit derivative used as a hedge that is held in the Authorised Firm's Trading Bookby calculating the excess of the current market value of all long positions over all short positions in all the Securitiesor credit derivatives issued by that Issuer, based on the seniority of those Securities or credit derivatives in the liquidation of the Issuer.
Authorised Firmmust not offset an Exposureto one Issueragainst an Exposureto another even where the Issuersare in a group of Closely Related Counterparties.
Authorised Firmmust include as a long position a commitment by it to buy:(a) a debt Securityor an equity at a future date; and(b) under a note issuance facility, at the request of the Issuer, a Securitythat is unsold on the issue date.
Authorised Firmmust include as a short position a commitment by it to sell a debt Securityor equity at a future date.
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
Exposureto the Issuerof the equity.
PIB A4.11.21 Guidance
An interest rate leg of an equity swap, or interest rate or currency swap does not generate an
Exposureto an Issuer.
An Authorised Firm must, when determining its
Exposureto an Issuerarising from an Option, use an Exposurevalue based on the level of change in the price that will result from the default of the underlying instrument.
PIB A4.11.23(1) An
Authorised Firmmust treat the value of:(a) a call Optionas equal to market value; and(b) a put Optionas equal to the strike price minus market value.(2) An Authorised Firmmust aggregate the resulting option Exposures to each underlying counterparty and if there is a negative net Exposureafter aggregation of all option Exposures, the option Exposure must be set to nil.
PIB A4.11.24 PIB A4.11.24
Authorised Firmmust, for the purposes of Concentration Risk, treat an Exposureto an Issuerarising from an index or basket of debt Securitiesor a non-broad-based equity index or basket, as a series of Exposuresto the Issuersof the underlying instruments or equities in accordance with the procedures in PIB chapter 4.
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
Exposureto any Issuer.
Authorised Firmwhich 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 Collateralreceived against repurchase agreements or Securitiesand commodities borrowing must also be treated as a balance sheet item under sections PIB 4.9 and PIB 4.13.
Authorised Firmmust treat a reverse repurchase agreement or Securitiesand commodities lending in its Non-Trading Bookas a collateralised loan and the Collateralit holds as an asset, provided that the Collateralis eligible financial Collateralas defined in PIB Rule 4.13.5. If the Collateralis not such an eligible financial Collateral, the Authorised Firmmust treat the transaction as an unsecured loan to the Counterparty.
Authorised Firmwith repurchase agreements and reverse repurchase agreements in its Trading Bookhas an Exposureto:(a) the Issuerof the Securityit has sold in a repurchase agreement; and(b) the Counterpartywhere the Securitiesor cash given by the Authorised Firmexceed the Securitiesor cash it receives (i.e. there is a net margin given by the Authorised Firm) in a repurchase agreement or reverse repurchase agreement.
Authorised Firmmust calculate in accordance with PIB section 5.10 an Exposureto the Issuerarising from the Underwritingor sub-underwriting of a new Issueof Securities.