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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
Rulebook Modules
Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER33/02-19]
Sourcebook Modules
Consultation Papers
Policy Statements
DFSA Codes of Practice
Amendments to Legislation
Media Releases
Financial Markets Tribunal

Whole SectionText only Print Print Manager Link

(1 version)
Dec 9 2012 onwards

PIB A5.1 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. In accordance with PIB section 5.2, an Authorised FirmG is required to have a Market Risk policy. The Market RiskG policy should address all aspects of Market RiskG whether arising from assets, liabilities or the mismatch between assets and liabilities and whether off or on-balance sheet. Such a policy would be expected to include the following information:
a. how, with particular reference to its activities, the Authorised FirmG defines and measures Market RiskG ;
b. the Authorised Firm'sG investment or trading strategy distinguishing, as applicable, between its Trading and Non-Trading BooksG ;
c. the detailed limit structure for Market RiskG which should:
i. address all key risk factors;
ii. be commensurate with the volume and complexity of activity; and
iii. be consistent with the Authorised Firm'sG strategy, historical performance, and the overall level of earnings or capital the Authorised FirmG is willing to risk;
d. procedures for:
i. approving new products and activities that give rise to Market RiskG ;
ii. regular risk position and performance reporting;
iii. limit exception reporting and approval; and
iv. reporting and controlling of off-market trades, if these are permitted;
e. where internal models are used to set Capital RequirementsG (as provided for in PIB section 5.3), the methods and assumptions used in these models and how the models are tested; and
f. the allocation of responsibilities for implementing the Market RiskG policy and for monitoring adherence to, and the effectiveness of, the policy.
2. An Authorised FirmG should measure its Market RiskG using a robust and consistent methodology. The appropriate method of measurement will depend upon the nature of the products traded. The Authorised FirmG should consider whether the measurement methodologies should be tested, for example, through back-testing, and the frequency of such testing.
3. An Authorised FirmG should be able to measure its Market RiskG ExposureG both across risk types, such as interest rate, foreign exchange and commodities, and across the entire portfolio.
4. Where an Authorised FirmG is a member of a GroupG , which is subject to consolidated supervision, the GroupG should be able to monitor Market RiskG ExposuresG on a consolidated basis (PIB chapter 8).
5. An Authorised FirmG should have the capability to assess the impact of any new transaction on its Market RiskG position on an on-going basis, and should be capable of carrying out a full measurement of its positions at least daily.
6. An Authorised FirmG should implement an effective system for monitoring its Market RiskG . This system should be independent of those within the Authorised FirmG who are responsible for taking Market RiskG .
7. An Authorised FirmG should implement a system of management reporting which provides relevant, accurate, comprehensive, timely and reliable Market RiskG reports to relevant functions within the Authorised FirmG . These reports should:
a. alert senior management's attention to the size of ExposuresG and the relationship between these ExposuresG and limits;
b. cover exceptions to the Authorised Firm'sG Market RiskG policy;
c. present the results from stress tests undertaken; and
d. analyse and explain any changes to the level and nature of Market RiskG and any remedial action proposed or taken.
8. An Authorised FirmG should have procedures, including stop-loss procedures, for taking appropriate action according to the information within the management reports.
9. An Authorised FirmG should ensure that there are controls and procedures for reporting any trades booked at off-market rates.
10. An Authorised FirmG should ensure that risk monitoring is subject to a periodic independent check. Models used to determine or interpolate specific Market RiskG factors should be independently reviewed or otherwise validated.
11. Particular attention should be given to the monitoring of Market RiskG that does not conform to the usual Market RiskG policy, or which exceeds predetermined Market RiskG limits and criteria, but is sanctioned because of particular circumstances in accordance with the Authorised Firm'sG procedures. Unauthorised exceptions to policies, procedures and limits should be reported in a timely manner to the appropriate level of management along with any remedial action proposed or taken.
12. Market RiskG limits should be periodically reviewed in order to check their suitability for current market conditions and the Authorised Firm'sG overall risk appetite.
13. An Authorised FirmG should use a model or some form of analytical tool to assess risk in complex instruments or across portfolios. An Authorised FirmG which wishes to use such a model to determine part of its financial resources requirement, should refer to PIB section 5.3.
14. An Authorised FirmG should also use stress testing to determine the potential effects of economic downturns, market events, changes in interest rates, foreign exchange or liquidity conditions.
15. An Authorised FirmG should set an appropriate limit structure to control its Market RiskG ExposureG . The degree of granularity within the limit structure, or how hierarchical it is, will depend on the nature of the products traded (for example, whether the underlying risks are linear or non-linear) and the scale of the Authorised Firm'sG overall business (for example, whether the Authorised FirmG is an active market maker). An Authorised FirmG should set limits on risks such as simple price or rate risk as well as on the factors, DeltaG , GammaG , VegaG , RhoG , and ThetaG , arising from options positions.
16. Limits should also be imposed against net or gross positions, and in relation to maximum allowable loss ('stop-loss'), value at risk, maturity gap, and illiquid or volatile markets.
17. An Authorised FirmG should provide a process for the identification, timely reporting and subsequent action in respect of exceptions to limits. An Authorised FirmG should also ensure that limit breaches and action arising from exceptions are monitored. An Authorised FirmG may also consider whether it is appropriate to set intermediate thresholds that alert management when limits are approached, triggering review or other appropriate action, or both.
18. Various methods can be used to hedge Market RiskG . An Authorised FirmG should document the appropriate products to be used to hedge ExposureG and identify individuals within the Authorised FirmG or GroupG responsible for monitoring hedge performance.
19. An Authorised FirmG should ensure that it makes and maintains appropriate prudential records which show and explain the Authorised Firm'sG transactions, disclose its financial position and ExposureG to Market RiskG and enable it to demonstrate compliance with the DFSAG rules. In particular, an Authorised FirmG should have data history to enable it to perform back-testing of methods and assumptions used for stress and scenario testing and for value-at-risk models. Market RiskG records should be retained for at least six years.
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]