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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 A3.1 Guidance



Whole Section PDF

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.

1. Stress and scenario testing seek to anticipate possible losses or risks that might occur or become manifest. In applying them an Authorised FirmG needs to decide how far forward to forecast and may want to consider the following factors:
a. how quickly it would be able to identify events or changes in circumstances that might lead to a loss occurring or risk crystallising; and
b. after the event or circumstance has been identified, how quickly and effectively the Authorised FirmG could act to prevent or mitigate any resulting loss occurring or risk crystallising and to reduce its ExposureG to any further adverse event or change in circumstance.
2. For example, the time horizon over which stress and scenario testing would need to be carried out for the Market RiskG arising from the holding of investments would depend upon:
a. the extent to which there is a regular, open and transparent market in those assets, which would allow fluctuations in the value of the investment to be more readily and quickly identified; and
b. the extent to which the market in those assets is liquid (and would remain liquid in the changed circumstances contemplated in the stress or scenario test) which would allow the Authorised FirmG , if needed, to sell its holding so as to prevent or reduce its ExposureG to future price fluctuations.
3. Authorised FirmsG should focus on those scenarios and combinations of scenarios that are considered reasonably likely to occur. For this purpose other risks and losses include business risk, i.e. the potential impact of changes in business plans, future activities, and the business or economic environment.
4. In identifying what realistic combinations of losses or risks might occur or crystallise, an Authorised FirmG should take into account scenarios in which expected correlations occur and where they might break down.
5. In identifying scenarios and assessing their impact, an Authorised FirmG should take into account how changes in circumstances might impact upon:
a. the nature, scale and mix of future activities; and
b. the behaviour of CounterpartiesG , and of the Authorised FirmG itself, including the exercise of choices (including options embedded in financial instruments).
6. In determining whether it would have adequate financial resources in the event of each identified adverse scenario, an Authorised FirmG should:
a. only include financial resources that could reasonably be relied upon as being available in the circumstances of the identified scenario; and
b. consider any legal or other restriction on the purposes for which financial resources may be used, including any restriction on the transfer to the DIFCG of assets held in other jurisdictions.
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]