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PRU 2.2.20 Guidance for Form PIB 7 — Large Exposures

Instructional Guidelines

An Authorised Firm is required to identify and manage its exposures in accordance with PIB Rule 4.5.6 and PIB section A4.8.

As per the Glossary, an Exposure, whether in an Authorised Firm's Non-Trading Book or Trading Book, or both, to a Counterparty or Group of Closely related Counterparties connected to the Authorised Firm which in the aggregate equals or exceeds 10% of the Authorised Firm's Capital Resources.

The 20 largest exposures should be listed and, if requested, any other exposure that exceeds 10% of the Authorised Firm's Capital Resources. Only exposures that are non-exempt are required to be reported in the first two tables.

Item No. Column Item Guidance
7.1   Capital Resources The capital resources used as the basis for monitoring and controlling large exposures should be calculated in the same way as those used for capital adequacy monitoring, i.e. the sum of allowable Tier 1 and Tier 2 capital less any deductions (as set out in PIB Table 2.6.2) — as per Form PIB6, Item No. 6.58.
The various percentage amounts should be specified in the relevant sections.
7.2   Twenty Largest Exposures Include in this table the twenty largest exposures to all types of Counterparty except those that are considered to be exempt.
Exposures to individual, or groups of closely related, Counterparties should be reported in descending order by size. Exposures to individual Counterparties which constitute a group of closely related Counterparties should be reported as one aggregate exposure.
  A Counterparty The identity of a Counterparty, as defined in the Glossary, in this context will generally be one of the categories as set out in PIB Rule A4.8.6.
  B Connected, Unconnected — Bank, Unconnected — Other, Government The Authorised Firm should clarify here into what category an exposure falls. These are set out in detail in Rules PIB A4.8.7 to PIB A4.8.11 but for the purposes of this form, an Authorised Firm should state whether an Exposure is to:
(i) a Connected Counterparty;
(ii) an Unconnected Counterparty or group of Closely Related Counterparties that are predominantly comprised of non-financial businesses;
(iii) an Unconnected Counterparty or group of Closely Related Counterparties that are predominantly comprised of financial businesses;
(iv) Central governments and central banks.
  C Amount of non-exempt exposure For exposures arising in the Non-Trading Book the amount at risk should, with certain exceptions detailed below, be reported as the book value of the Authorised Firm's actual or potential claims, contingent liabilities or assets.
Exposures should be calculated in accordance with IFRS or AAOFI standards.
For exposures arising in the Trading Book, all positions should be marked-to-market daily. Where a market determined price is not readily available, the Authorised Firm may generate its own mark-to-market valuation. Positions should be valued in accordance with the procedures outlined in the Authorised Firm's trading book policy statement.
This is set out in more detail in Rules PIB A4.8.13 to PIB A4.8.31.
  D Specific bad debt provision Include here the amount of specific bad debt provision that may have been made against a particular exposure.
  E Reduction by netting, collateral etc. As set out in PIB Rule 4.5.6 (d) (ii), the value of an exposure can be reduced through the following:
•   Collateral — discussed in more detail in PIB Section 4.6 and PIB Rule A4.8.32
•   Netting — discussed in more detail in Sections PIB 4.7 and PIB A4.9
•   Securitisation — discussed in more detail in Sections PIB 4.8 and PIB A4.10
•   Credit derivatives — discussed in more detail in Sections PIB 4.9 and PIB A4.11.
  F Exposure at reporting date after eligible set-offs Column C less the amounts in Columns D and E.
  G Amount of this exposure financed by own assets or unrestricted PSIAs For Exposures arising out of Islamic business, this column should be used to quantify the amount of the Exposure that is financed by the Authorised Firm's own assets or by unrestricted PSIA assets.
  H Amount of this exposure financed by restricted PSIAs. For Exposures arising out of Islamic business, this column should be used to quantify the amount of the Exposure that is financed by restricted PSIA assets.
7.3   Detail of exposures to connected counterparties This section comprises the disaggregated detail of all connected lending and exposures should be split into different counterparties within the connected group.
  A Financial or Non-financial company An Authorised Firm should indicate here if the exposure is to a bank or non-bank within its own group.
  B-H As for Item No. 7.2 As detailed above for the table in for Item No. 7.2.
7.4   Ten Largest Exempt Exposures An Authorised Firm is required to identify its exempt and partially exempt exposures as per Rules PIB 4.5.6 (e) and PIB A4.8.1 to PIB A4.8.4.
  A Reason for exemption The Authorised Firm should specify here under what section of PIB A4.8.1PIB A4.8.4 the Exposure is captured.
  B-H As for Item No.7. 2 As detailed above for the table in for Item No. 7.2.

Additional detail for Form PIB 7 — Appendix 1 — Largest 25 Exposures arising from Islamic contracts

Item No. Contract type Guidance
7A1.1 Musharaka Report all Musharaka contracts currently outstanding that exceed 10% of the Authorised Firm's Capital Resources. Details regarding the following should be included:
•   Whether the capital has been self financed or provided by PSIA accounts
•   The amount of capital redeemed during the period such as in the case of a diminishing Musharaka.
•   Any income or loss declared, any provisions being made to the value of the Musharaka and the net value of the investment.

FAS 4 of AAOIFI refers.
7A1.2 Mudaraba Report all Mudaraba financing contracts that would qualify as a Large Exposure. Identify the basis on which the Authorised Firm has provided the financing i.e. whether on a self financed or on a PSIA funds basis. FAS 3 refers.
7A1.3 Istisna'a/Parallel Istisna'a Report all Istisna'a contracts that would qualify as a Large Exposure. Identify the value of the Parallel Istisna'a and indicate what proportion of the value has been financed by Authorised Firm's own capital and the funds of PSIA account holders. FAS 10 refers.
7A1.4 Salam/ Parallel Salam Report all Salam contracts and Parallel Salam amounts that would qualify as a Large Exposure. The data is to be split into values financed by Authorised Firm's own capital and the restricted and unrestricted PSIA account holders. FAS 7 refers.
7A1.5 Ijarah/ Ijarah Muntahia Bittamleek Report all Ijarah assets on the valuation basis set out in FAS 8. Report also, all assets transferred to lessee for consideration or gift including the value of impairment before transfer of legal asset. State total depreciation/ amortisation charge and the net book value. This information is required to be provided for self financed and both forms of PSIA accounts. The data is to be split by the industrial sectors identified in the reporting statement. FAS 8 refers.
7.A1.6 Murabaha Report here all Murabaha exposures that would qualify as a Large Exposure. Divide exposures into self financed, PSIAR and PSIA unfunded exposures. FAS 2 refers.
PIB 8 — LIQUIDITY MISMATCH

As set out in PIB Rule 6.3.3, an Authorised Firm in Category 1 or 5 must use the Maturity Mismatch approach to measure its liquidity. This applies equally to Authorised Firms that have a branch presence in the DIFC as to those that are incorporated.

In accordance with PIB Rule 6.3.4, an Authorised Firm needs to complete separate returns for a business that is funded by: (i) its own assets; (ii) restricted PSIA assets; and (iii) unrestricted PSIA assets.

Liquidity reporting in individual currencies
The return should be completed on the basis of all currencies combined. Currencies should be translated into $ at the closing spot mid price on the reporting date and entered in the relevant time band. However, the DFSA may require institutions to provide management information on positions in individual currencies in the event of difficulties either in the individual institution or with the currency in question.

Cashflow versus maturity analysis approach
The policy aim is to ensure that institutions hold sufficient liquid assets to meet their obligations as they fall due and the DFSA has set mismatch guidelines to help secure the policy objective. The Form PIB 8 monitors Authorised Firms' compliance with the limits in two ways: firstly, by including a maturity analysis of known and/or potential cashflows out to six months and secondly, by a maturity analysis of assets and liabilities from 6 months to 5 years.

Institutions should report both inflows and outflows on the same basis. Therefore, if an institution reports inflows on the cashflow basis out to three months, it should also report outflows on the cashflow basis out to three months.

Items reported on a cashflow basis should include both interest and principal amounts, together with any other income relating to them. Items reported on a maturity basis should be reported at their value on the institution's books. However, any cashflows arising from these items (e.g. interest payments) within the cashflow reporting period should be included in the relevant cashflow periods. Thus cashflows (e.g. interest payments on a loan) arising from items (however reported) should be entered in the relevant cashflow timebands (i.e. those which the institution reports) when they fall due.

Provisions
Items should be reported net of specific provisions. General provisions should not be recorded on this return.

Residual Maturity
As set out in PIB Rule A6.2.1, outflows (such as deposits and other liabilities) are to be included according to their earliest possible repayment date. In this context, the earliest repayment date means the first rollover date or the shortest period of notice required to withdraw the funds or to exercise a break clause, where applicable. Inflows (such as loans) are to be entered as occurring on the latest possible repayment date. Purely technical break facilities should be disregarded for fixed term loans. Where the Authorised Firm has loans outstanding at the reporting date under revolving credit lines and has not received notification that they will be redrawn on maturity, the intermediate date should be taken as the maturity date.

Time bands
The time band 'Overdue'should be used to record cashflows where assets or other items giving rise to cashflows are non-performing, poorly performing or there is reasonable doubt about the certainty of receipt of inflows of funds pertaining to them. Where an asset or cashflow previously reported as overdue is contractually rescheduled according to a written agreement, institutions should cease to report these items as 'overdue' and report them according to the new agreed dates for repayment.

The timeband 'Demand (incl next day)' comprises cashflows or asset items due, available or maturing on the next business day after the reporting date. Cashflows arising or assets/liabilities maturing on a non-business day should be reported as taking place on the following business day. Funds callable at one day's notice should be entered as two-day maturity unless notice has been received or given on the reporting date.

Netting of debts and claims
All claims and liabilities should be reported gross. Authorised Firms should not net (or offset) claims on counterparties or groups of counterparties against debts owed to those counterparties or groups of counterparties, even where a legal right of set off exists. Where the maturity of the claims and debts falls within the same timeband, the claims and debts will automatically offset each other on the return in the calculation of the mismatch.

Marketable securities
An asset is considered to be marketable if it meets the requirements as set out in PIB Section A6.3(2) — essentially, these are assets that could be readily converted into cash where necessary. These assets, outlined in Column A, are reported in rows 8.1.1–8.1.10, Highly liquid / marketable assets. Authorised Firms should enter the full value of the marketable asset concerned in Column B, apply the discount rate as in Column C, and thereby calculate the discounted mark to market value of the asset in Column D. Discounts are applied to reflect that an institution may realise less than the market price quoted for an asset where the institution is seeking to realise assets quickly because of liquidity problems pertaining either to itself, or to general market conditions, or both.

The Authorised Firm should then allocate the discounted value of the assets to either of Columns G or H determined by the length of the settlement period for the instrument in question. This reflects the length of time it would take for an Authorised Firm to receive the proceeds of any sale. Where the settlement period for items is more than eight days, or where there are other factors which mean that funds would not be received within eight days, were the assets are sold or repo'd today, then the funds should be recorded as receivable Column H 'Over 8 days to 1 month'. Where settlement or other delays mean that funds would not be received within one month, then the items should be recorded in the maturity analysis section of the form.

Marketable assets maturing at exactly one month should be reported in the cashflow section of the return. Authorised Firms may however include the full value of the asset in the one month timeband and not discount at all during the life of the asset.

Where assets have a residual maturity of less than one month, the DFSA recognises that it is not relevant to apply automatically a discount to such assets. In general, these assets should be entered as cashflows in the relevant timebands in rows 8.1.12–8.1.25 and no discount will be applied.

Assets which do not meet the criteria for marketable assets, or which cannot be fitted into the table in PIB Rule A6.3.1(4), are non-marketable assets for the purposes of this return and should be reported in the form according to their residual maturity. This covers for example:
a. Non-investment grade debt instruments (as rated by a recognised credit agency) issued by a Zone 2 issuer;
b Non-investment grade debt instruments (as rated by a recognised credit agency) issued by a non-government Zone 1 issuer;
c. Commercial paper and certificates of deposit that do not meet the definition of marketable assets.

Authorised Firms should ensure that there is no double counting of cashflows (of principal or interest) arising from holdings of marketable assets on the form.
Item No. Item Guidance
8.1 INFLOWS  
  Highly liquid / marketable assets As described in detail above.
8.1.1 Cash Holdings of notes and coins.
8.1.2

8.1.3

8.1.4
Cen gov't (Z1) sec — 1 yr or less

Cen gov't (Z1) sec — 1–5 yrs

Cen gov't (Z1) sec — over 5 yrs
Central government (including central government guaranteed) paper and paper eligible for discount at the Central Bank issued a Zone 1 Central Government / another Zone 1 issuer. Both fixed and variable rate securities should be reported. Only record those securities currently in the reporting institution's ownership.
8.1.5

8.1.6

8.1.7
Non gov't sec — 6 mths or less

Non gov't sec — 6 mths–5 yrs

Non gov't sec — over 5 yrs
Debt instruments that are of investment grade. Only those securities in the reporting institution's ownership, which the institution may freely dispose of at any time with no restrictions, should be recorded. Those assets pledged to another institution or otherwise encumbered should not be included.
8.1.8 Other cen gov't debt (active) Central government (including central government guaranteed) paper and paper eligible for discount at the Central Bank issued by a Zone 2 Central Government/ another Zone 2 issuer. Include only that debt issued by, or fully guaranteed by, Zone 2 central governments and central banks that is actively traded. Only the debt currently in the reporting institution's ownership should be recorded.
8.1.9 Highly liquid equities Equities that are eligible for a specific risk weight of 4% or less under the DFSA's Rules regarding the capital requirement for Market Risks and which are currently in the reporting institution's possession.
8.1.10 Total Sum of Item Nos. 8.1.1–8.1.9, for Columns B, D, G, H and K. With 8.1.10 K being the overall total amount of marketable assets.
8.1.11 Non-marketable securities Securities which the Authorised Firm holds or will receive, but which it cannot classify as marketable. These should be reported according to the redemption value of the asset or alternatively, where the redemption value is unavailable or not appropriate (e.g. in the case of equities), the book value. Marketable assets maturing within one month reported at their full marked-to-market value, i.e. undiscounted, should also be reported here.
8.1.12 Inter-bank Inflows arising from placements with other financial institutions. Include the inflows from those entities that would attract a 20% counterparty weighting. Include also that element of committed facilities provided to the Authorised Firm where notification of draw down date has been given. Exclude inflows from any bank entities within the group.
8.1.13 Intergroup / related Inflows from counterparties connected to the Authorised Firm. Entries should be made in this item rather than any other item in the Wholesale section if any intragroup/connected counterparties are involved.
8.1.14 Corporate Inflows from non-bank, non-connected corporate counterparties. Initial margins held at clearing houses should be entered here according to their residual maturity. Repayments from leases should also be recorded in this line.
8.1.15 Govt / public sector — Zone 1 Inflows from central governments, public sector entities, local authorities and central banks in Zone 1 countries.
8.1.16 Govt / public sector — Zone 2 Inflows from central governments, public sector entities, local authorities and central banks in Zone 2 countries.
8.1.17 Repos / reverse repos Include any transactions relating to repos and reverse repos. Authorised Firms should also enter any transactions relating to stock borrowing and lending.
8.1.18 Forward foreign exchange Cashflows relating to forward purchases of foreign currency, where an exchange of principal is effected at the start or maturity of the swap. The amount received should be entered in the appropriate maturity band.
8.1.19 Forward sales and purchases The cash leg of any forward sales should be treated as an inflow in the timeband corresponding to the date of the forward sale. For forward purchases, where the asset purchased is a marketable asset, the Authorised Firm should report the USD equivalent discounted value of the security purchased at the maturity of the contract. Where the asset purchased is non-marketable, the institution should enter the USD equivalent discounted value of the security at the maturity of the asset.
8.1.20 Swaps & FRAs For interest rate and currency swaps, enter the receipts of fixed and floating legs in the cashflow section. For FRAs, enter the marked-to-market receipt in the relevant time period. The amount of receipts should be derived from the contract's present value at yields prevailing at the reporting date.
8.1.21 Commodities Inflows from the sale of commodities held by the Authorised Firm.
8.1.22 Trade related letters of credit Inflows arising from trade related letters of credit.
8.1.23 Fees (incl Mudarib) Report here fees, commissions or other income receivable by the Authorised Firm relating to their wholesale business, according to their known date of receipt. Where the date of receipt is unknown, do not report these flows.
8.1.24 Other funding sources Include here any other funding sources not included elsewhere, according to their cashflows.
8.1.25 Total wholesale Inflows Sum of Item Nos. 8.1.11–8.1.24, Columns E to J with total in Column K and Columns L to N with total in Column O.
8.1.26 Total inflows on a cashflow basis

Total on a maturity basis
Sum of Item No. 8.1.10, Column K + Item Nos. 8.1.11–8.1.24, Columns E to J, with the total in Column K.

Sum of Item Nos. 8.1.11–8.1.24, Columns L to N. with the total in Column O.
8.2 OUTFLOWS  
8.2.1 Non-marketable securities Include here at residual maturity outflows pertaining to maturing securities or debt instruments, which cannot be classified as marketable. Marketable assets maturing within one month at their full marked-to-market value, i.e. undiscounted should also be reported here.
8.2.2 Inter-bank Funds Outflows arising from placements with or from, or repayments of loans to or from, banks. Also include the entire outflows to those entities that would attract a 20% counterparty weighting. Exclude from this item loans to, or placements with, or deposits / placements from, bank entities within the group.
8.2.3 Intergroup / related Outflows of funds to counterparties connected to the reporting institution. Entries should be made in this item rather than any other item in the Wholesale section if any intragroup/connected counterparties are involved.
8.2.4 Corporate Outflows to non-bank, non-connected, corporate counterparties.
8.2.5 Govt / public sector — Zone 1 Report funds lent to central governments, public sector entities, local authorities and central banks in Zone 1 countries. Where an Authorised Firm is required to place funds on deposit with central banks and monetary authorities, these should be entered as an outflow in the relevant time band.
8.2.6 Govt / public sector — Zone 2 Report funds lent to central governments, public sector entities, local authorities and central banks in Zone 2 countries. Where an Authorised Firm is required to place funds on deposit with central banks and monetary authorities, these should be entered as an outflow in the relevant time band.
8.2.7 Repos / reverse repos Outflows related to repos or reverse repos. Also include any outflows relating to stock borrowing and lending.
8.2.8 Forward foreign exchange Enter any cashflows relating to forward sales of foreign currency, where an exchange of principal is effected at the start or maturity of the swap. The amount paid should be entered in the appropriate maturity band.
8.2.9 Forward sales and purchases For forward sales, the sterling (or euro) equivalent discounted value of the security sold should be recorded as an outflow. The cash leg of any forward purchases should be treated as an outflow in the timeband corresponding to the date of the forward purchase.
8.2.10 Swaps & FRAS For interest rate and currency swaps, enter payments of fixed and floating legs in the cashflow section.
For FRAs, enter the marked-to-market payment in the relevant time period. The amount paid should be derived from the contract's present value at yields prevailing at the reporting date.
8.2.11 Commodities Outflows from the purchase of commodities held by the Authorised Firm.
8.2.12 Trade related letters of credit Outflows arising from trade related letters of credit.
8.2.13 Dividends, tax & other costs Outflows arising from dividends, tax etc.
8.2.14 Ijarah asset purchases Outflows for commitments made for the purchase of these assets.
8.2.15 Other outflows Any outflows relating to payments of dividends and tax, or any other outflows that have not previously been reported elsewhere. Also report any outflows relating to settlement accounts, using the trade date plus the settlement period to determine the appropriate timeband.
8.2.16 Other off-balance sheet Any outflows relating to off balance sheet items that have not been reported elsewhere.
8.2.17 Total Wholesale Outflows Sum Item Nos. 8.2.1–8.2.16, Columns E to J with total in Column K and Columns L to N with total in Column O..
8.2.18 Total Outflows on a Cashflow basis

Total on a maturity basis
Sum of Item Nos. 8.2.1–8.2.16, Columns E to J, with the total in Column K.

Sum of Item Nos. 8.2.1–8.2.16, Columns L to N, with the total in Column O.
8.3 CALCULATION OF LIQUIDITY MISMATCHES Authorised Firms should monitor compliance with their liquidity mismatch guidelines each business day and should report in this section the mismatch on the reporting date, using the data from the previous parts of the return.
8.3.1 Type of business Denotes business financed by different sorts of assets.
8.3.2 Timeband The timebands for which limits are set: Sight to 8 days and Sight to one month.
8.3.3 Total discounted marketable assets Figure from row Item No. 8.1.10, Column G for S-8 days and Column G plus H for S-1 month.
8.3.4 Total standard inflows Figure from row 8.1.25, column F plus G for S-8 days and Column F plus G plus H for S-1 month.
8.3.5 Total standard outflows Figure from row 8.2.17, column F plus G for S-8 days and Column F plus G plus H for S-1 month.
8.3.6 Total relevant deposits This figure provides the denominator for the mismatch calculation (see Item No. 8.3.7 below):
•   For conventional Authorised Firms, the figure is obtained from Form PIB 1, Item No. 1.10.
•   For Islamic Authorised Firms, see next section of the table.
•   For branches, figure from form PIB 9, item no 9.26.
8.3.7 Mismatch as a % of total deposits As set out in Rules PIB 6.3.4 and PIB 6.3.5, the mismatch positions should not exceed -15% or -25% for the sight — 8 days and sight — 1 month timebands respectively.

Additional Guidance for Islamic Contracts:

8.1 Inflows   All inflows should be taken as occurring at the last possible contractual repayment date. The treatment of inflows for Islamic contracts are as follows and it is for the authorised institution to determine in which of the categories the inflows should be recorded. In the event of any doubt, the institution should contact its regular supervisory contact at DFSA.
    Mudaraba Inflows of capital should be reported at the latest redemption date or as assets maturing at the latest possible redemption date. Profits on Mudaraba should only be reported to the extent that it is being reported at the reporting date.
    Musharaka Capital inflows on a normal Musharaka contract should be entered as occurring on the latest possible termination date and in the case of a diminishing Musharaka at the latest redemption date. Inflows on profits should only be entered if it is being distributed at reporting date.
    Murabaha Receivables Inflows reported should include instalment payments and related accrued profit at the latest possible repayment date (or assets maturing at such a date).
    Ijarah/ Ijarah Muntahia Bittamleek Report all inflows occurring from Ijarah lease rentals at the last possible payment date. Where the lessee has option to purchase the asset either during the duration of the lease or at the end of the contract, the amount to be received should be reported as an inflow at the latest possible exercise date.
    Salam and Parallel Salam Enter the amount of inflows as occurring at the latest possible delivery date. If payments are received in the form of instalments (Parallel Salam), only enter the amount of instalments occurring at their latest possible repayment date (or as an asset maturing at the latest repayment date). Enter commodity flows separately in the line market commodities.
    Istisna'a and Parallel Istisna'a Inflows should be assumed to occur at the latest possible completion date. If repayment is via instalments, inflows should be on the latest instalment date.
8.2 Outflows   All outflows should be taken as occurring at the earliest possible contractual repayment date. In the case of a Liability, assume the outflows to occur at the earliest possible maturity date. For Islamic contracts, outflows should only be recognised when there is already in existence a defined agreement between the parties for a particular Islamic Contracts. As previously stated, Authorised Firms will be expected to refer to the appropriate AAOIFI FAS pronouncement in respect of Islamic contracts. These include Mudaraba, Musharaka, Murabaha, Salam and Parallel Salam, Istisna'a and Parallel Istisna'a and Ijara or Ijarah Munatahia Bitamleek.
    Salam and Parallel Salam For Salam transactions enter amount of outflows as additional advances committed at the earliest possible drawdown date.
    Istisna'a Outflows on Istisna'a contracts are to be entered as occurring at the earliest possible drawdown date. If drawdown occurs based on percentage completion, the outflows should be assumed to occur at the earliest completion date or as a liability maturing at the earliest completion date.
    Ijarah Commitments made for the purchases of assets for Ijarah purposes should be included as outflows at the earliest date committed for the purchase.
8.3.6 Total relevant deposits   For self-financed business, Authorised Firms should use the figure from Form PIB 2, Item No. 2.20.
For business financed through PSIAs, the appropriate figure should be derived from the amounts due (akin to deposits) to PSIA account holders.