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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]