PRU-EPRS 1.2 Instructional Guidelines

Past version: effective from 16/12/2007 - 13/04/2013
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1. Authorised Firms are referred to PIB Chapter 4 and PIB Appendix 4 to understand the rationale behind risk weighting of assets in the Non-Trading Book and the relevant rules for risk weighting. In particular, PIB Section A4.3 contains detailed rules on classifying exposures in the appropriate risk weight categories. If an Authorised Firm is uncertain as to where to classify a particular exposure, it should contact DFSA to obtain this clarity. Particular care should be taken for exposures classified in anything other than the 100% risk weight category.
2. Among other things, risk weights may be reduced on Non-Trading Book items by obtaining a guarantee from a third party or a party connected to the Authorised Firm (the "guarantor"). Provided the conditions laid out in Rules PIB A4.3.1 to PIB A4.3.4 are met, the Authorised Firm may opt to use the Counterparty risk weight of the guarantor where this risk weight is less than that for the underlying Counterparty.
3. In respect of Counterparty weightings for exposures in the Non-Trading Book relating to the Islamic contracts, Authorised Firms are referred Rules PIB 3.5.1 to PIB 3.5.5. In particular, attention is drawn to the weightings referred to in table 2 by Islamic contract type
4. On-balance sheet items: Analyse each of the on-balance sheet items and classify them into various risk weight categories as per applicable PIB rules referred above. The applicable risk weight categories are listed for each of the asset groups. The total value of assets classified into a particular risk weight category should be entered in the second column — titled "Non-Trading — Amount", against the respective risk weight percentages. Amount of assets classified as forming part of the Trading Book under each of the major asset groups should be entered in the column titled - "Trading Book Amount". However, Trading Book Amounts are captured primarily to ensure completeness and are not analysed across various risk weights.
5. Off-balance sheet items: All the off-balance sheet items should be analysed and classified on the basis of the Credit Conversion factors applicable to them. Details of Credit Conversion Factors are set out in Rules PIB A4.3.10 to PIB A4.3.14. These are then analysed and classified further into various risk weights as per rules in PIB Section A4.3. The second linked form which deals with off-balance sheet items provides for entry of the aggregate amount of off-balance sheet items classified into categories representing a specific credit conversion factor. Each credit conversion factor is dealt with in a separate table. For each credit conversion factor, the items are to be classified and aggregated into trading book and Non-Trading Book amounts. The aggregate Non-Trading Book amount for that particular credit conversion factor is then classified in to those pertaining to different risk weight categories. The total amount of items which deserve a specific risk weight should be entered in the respective row under the column titled "Non_Trading Amount".
6. Specifically, guarantees given to a company not connected to the reporting institution should be risk weighted at 100% and those for connected companies should be deducted from the reporting institution's capital base.
7. Sale and Repurchase Agreements: Attention is drawn to Rules PIB A4.3.15 to PIB A4.3.17 which note that the Counterparty weight of a repo agreement is by reference to the issuer of the asset subject to the agreement and not to the Counterparty to the repurchase agreement. The weight on a reverse repo is determined as if it were a collateralised loan to a Counterparty
8. Forward deposits placed: The risk weight should be determined according to the Counterparty with whom the deposit will be placed.
9. Endorsement of bills: Exposures arising out of endorsed bills not accepted by banks will attract the Counterparty risk weighting of the issuer. If it has been endorsed by another bank, a reduced risk weighting applies.
10. Other commitments: Authorised Firms are referred to the detail of Rules PIB A4.4.1 to PIB A4.4.7 in respect of determining the maturity of commitments where they have been renegotiated or are linked commitments.
11. OTC derivative contracts: In the third linked form provide details regarding the OTC derivative contracts. The calculation of the Credit Equivalent Amount is set out in PIB Rule A4.5.12. Authorised Firms are referred to the table in PIB Rule A4.5.14 which sets out the calculation of Potential Future Credit Exposures with detailed rules on how to net them being set out in PIB Rule A4.9.1.
12. Capital charge on the Non-Trading Book assets (i.e. CRCOM) is derived by multiplying the sum of risk weighted assets from the Non-Trading Book by 8%. The main form of B10A1 indicates the Total Non-Trading Book risk weighted assets and the resultant CRCOM. CRCOM thus calculated is used in Form B60 for the purposes of calculating capital adequacy.
Derived from GM5/2007 (Made 16th December 2007). [VER1/12-07]