PRU-EPRS 1.21 Instructional Guidelines

1. As set out in PIB Rule 9.3.3, an Authorised Firm in Category 1 or 5 should 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 here.
2. In accordance with PIB Rule 9.3.4, an Authorised Firm needs to complete separate returns for a business that is funded by:
i. PSIAU's; and
ii. Deposits.

Liquidity reporting in individual currencies

3. 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

4. The policy aim here 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 B80 monitors Authorised Firms' compliance with the limits in two ways: first, 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.
5. 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.
6. 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

7. Items should be reported net of specific provisions.

Residual Maturity

8. As set out in PIB Rule A9.2.1, 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

9. The time band 'Overdue' should be used to record cash flows where assets or other items giving rise to cash flows 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 cash flow 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.
10. The time band 'Demand (including next day)' comprises cash flows or asset items due, available or maturing on the next business day after the reporting date. Cash flows 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

11. 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 time band, the claims and debts will automatically offset each other on the return in the calculation of the mismatch.

Marketable securities

12. An asset is considered to be marketable if it meets the requirements as set out in PIB Section A9.3.1(2) — essentially, these are assets that could be readily converted into cash where necessary. These assets are reported under the section 'Highly liquid / marketable assets'. Authorised Firms should enter the full value of the marketable asset concerned in Column 'Marked to market' against the applicable discount rate in Column 'Discount currency'. The discounted value is then calculated by EPRS. 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 the firm itself, or to general market conditions, or both.
13. The Authorised Firm should then allocate the discounted value of the assets to either of Columns '8 days & under' or 'Over 8 days to 1 month' 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, where the assets are sold or repo'd today, then the funds should be recorded as receivable in Column '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.
14. Marketable assets maturing at exactly one month should be reported in the cash flow section of the return. Authorised Firms may however include the full value of the asset in the one month time band and not discount at all during the life of the asset.
15. 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 under 'Wholesale' section of the form and no discount will be applied.
16. Assets which do not meet the criteria to be marketable assets, or which do not otherwise qualify for inclusion in the table in PIB Rule A9.3.1(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 with a Credit Quality Grade ("CQG") of 4 or higher; and
b. Commercial paper and certificates of deposit that do not meet the definition of marketable assets.
17. Authorised Firms should ensure that there is no double counting of cash flows (of principal or interest) arising from holdings of marketable assets on the form.
Item Instructional Guidelines
INFLOWS  
Highly liquid / marketable assets As described above.
Cash Holdings of notes and coins.
Central gov't sec — 1 yr or less

Central gov't sec — 1 — 5 yrs

Central gov't sec -over 5 yrs
Central government (including central government guaranteed) paper and paper eligible for discount at the Central Bank with CQG 1, 2 or 3. Both fixed and variable rate securities should be reported. Only record those securities currently in the reporting institution's ownership.
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 with CQG 1, 2 or 3. 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.
Other cen gov't debt (active) Central government (including central government guaranteed) paper and paper eligible for discount at the Central Bank with CQG of 4, 5 or 6. Include only that debt issued by, or fully guaranteed by, central governments and central banks with CQG's of 4, 5 or 6 that is actively traded. Only the debt currently in the reporting institution's ownership should be recorded.
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.
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.
Inter-bank Inflows arising from placements with other Financial Institutions. Include 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.
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.
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.
Govt / public sector Inflows from central governments, public sector entities, local authorities and central banks with CQGs of 1, 2 or 3.
Govt / public sector Inflows from central governments, public sector entities, local authorities and central banks with CQGs of 1, 2 or 3.
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.
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.
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.
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.
Commodities Inflows from the sale of commodities held by the Authorised Firm.
Trade related letters of credit Inflows arising from trade related letters of credit.
Fees (incl Mudarib) Report here fees, commissions or other income receivable by the Authorised Firm relating to its wholesale business, according to its known date of receipt. Where the date of receipt is unknown, do not report these flows.
Other funding sources Include here any other funding sources not included elsewhere, according to their cashflows.
OUTFLOWS  
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.
Inter-bank Funds Outflows arising from placements with or from, or repayments of loans to or from, banks. Exclude from this item loans to, or placements with, or Deposits / placements from, bank entities within the Group.
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.
Corporate Outflows to non-bank, non-connected, corporate Counterparties.
Govt / public sector Report funds lent to central governments, public sector entities, local authorities and central banks with CQGs of 1 , 2 or 3. 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.
Govt / public sector Report funds lent to central governments, public sector entities, local authorities and central banks with CGQs of 4 or higher. 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.
Repos / reverse repos Outflows related to repos or reverse repos. Also include any outflows relating to stock borrowing and lending.
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.
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.
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.
Commodities Outflows from the purchase of commodities held by the Authorised Firm.
Trade related letters of credit Outflows arising from trade related letters of credit.
Dividends, tax & other costs Outflows arising from dividends, tax etc.
Ijarah asset purchases Outflows for commitments made for the purchase of these assets.
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.
Other off-balance sheet Any outflows relating to off balance sheet items that have not been reported elsewhere.
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.
Type of business Denotes business financed by different sorts of assets.
Timeband The timebands for which limits are set: Sight to 8 days and sight to one month.
Total discounted marketable assets Figure from row "Total" for "High Liquid / Marketable Assets" section Column "8 days & Under" for S-8 days and Columns "8 days & Under" and "Over 8 days to 1 month" for S-1 month.
Total standard inflows Figure from row "Total Wholesale Inflows", columns "Demand" and "8 days & Under" for S-8 days and Columns "Demand", "8 days & Under" and "Over 8 days to 1 month" for S-1 month.
Total standard outflows Figure from row "Total Wholesale Outflows", columns "Demand" and "8 days & Under" for S-8 days and Columns "Demand", "8 days & Under" and "Over 8 days to 1 month" for S-1 month.
Total relevant Deposits This figure provides the denominator for the mismatch calculation
•  For conventional Authorised Firms, the figure is obtained from Form B10, item B100_210T;
•  For Islamic Authorised Firms, see next section of the table;and
•  For Branches, figure from form B90, item B900_610T.
Mismatch as a % of total deposits As set out in Rule 9.3.4, the mismatch positions should not exceed -15% or -25% for the sight — 8 days and sight — 1 month timebands respectively.

Additional Instructional Guidelines for Islamic Contracts

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 Firm 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 the 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.
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.
Total relevant Deposits   For self-financed business, Authorised Firms should use the figure from Form B20, item B100_210T.

For business financed through PSIAs, the appropriate figure should be derived from the amounts due (akin to Deposits) to PSIAU account holders.
Derived from GM5/2007 (Made 16th December 2007). [VER1/12-07]
[Amended] [VER2/04-13]