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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
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Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER33/02-19]
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  Versions
(1 version)
 
Dec 9 2012 onwards

PIB 4.13.12

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The definitive version of DFSA handbook text is the PDF version as that is the text of the instrument as made and published by the DFSA.

To view past versions of this module in PDF format, please visit the Archive.

An Authorised FirmG must not recognise the effects of Credit RiskG mitigation of any Credit DerivativeG unless all of the following requirements are complied with:

(a) the terms and conditions of any credit protection obtained via a Credit DerivativeG must be set out in writing by both the Authorised FirmG and the provider of credit protection;
(b) the Credit DerivativeG must represent a direct claim on the provider of credit protection;
(c) the extent of the credit protection cover is clearly defined and incontrovertible;
(d) other than in the event of non-payment by the Authorised FirmG of money due in respect of the Credit DerivativeG , there is an irrevocable obligation on the part of the provider of the credit protection to pay out a pre-determined amount upon the occurrence of a credit event, as defined under the Credit DerivativeG contract;
(e) the Credit DerivativeG contract must not contain any clause, the fulfilment of which is outside the direct control of the Authorised FirmG , that:
(i) would allow the provider of credit protection to cancel the credit protection cover unilaterally;
(ii) would increase the effective cost of the credit protection cover as a result of deteriorating credit quality of the underlying ExposureG ;
(iii) could prevent the provider of credit protection from being obliged to pay out in a timely manner in the event that the underlying obligor fails to make any payment due; or
(iv) could allow the maturity of the credit protection agreed ex-ante to be reduced ex-post by the provider of credit protection;
(f) the credit events specified by the contracting parties must at a minimum cover:
(i) failure to pay the amounts due under terms of the underlying ExposureG that are in effect at the time of such failure (with a grace period, if any, that is closely in line with the grace period in the underlying ExposureG );
(ii) bankruptcy, insolvency or inability of the underlying obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
(iii) restructuring of the underlying ExposureG involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account);
(g) the Credit DerivativeG must not terminate prior to the maturity of the underlying ExposureG or expiration of any grace period required for a default on the underlying ExposureG to occur as a result of a failure to pay;
(h) a robust valuation process to estimate loss reliably must be in place in order to estimate loss reliably for any Credit DerivativeG that allows for cash settlement. There must be a clearly specified period for obtaining post-credit event valuations of the underlying obligation;
(i) where the right or ability of the Authorised FirmG to transfer the underlying ExposureG to the credit protection provider is required for settlement, the terms of the underlying ExposureG must provide that any required consent to such transfer may not be unreasonably withheld;
(j) the identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the credit protection provider. The Authorised FirmG must have the right or ability to inform the credit protection provider of the occurrence of a credit event; and
(k) the underlying obligation and the reference obligation specified in the Credit DerivativeG contract for the purpose of determining the cash settlement value or the deliverable obligation or for the purpose of determining whether a credit event has occurred may be different only if:
(i) the reference obligation ranks pari passu with or is junior to the underlying obligation; and
(ii) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]