Home   Browse contents   View updates   Search  
     Quick search

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 A10.2 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. This GuidanceG is relevant to an Authorised FirmG as described in PIB section 10.4 (that is, a firm in CategoryG 1, 2, 3A or 5) in regard to an Internal Risk Capital Adequacy Assessment ProcessG (referred to in this GuidanceG as an ICAAPG ).

Purpose and process of the ICAAPG

2. The ICAAPG is an internal process of an Authorised FirmG which enables it to determine and maintain the amount and quality of capital that is adequate in relation to the Authorised Firm'sG risk profile as assessed in the IRAPG . Authorised FirmsG are encouraged to maintain capital over and above the regulatory minimum capital. The ICAAPG , in conjunction with the IRAPG , should be embedded in the Authorised Firm'sG business and organisational processes.
3. When assessing its capital needs, an Authorised FirmG should take into account the impact of economic cycles, and sensitivity to other external risks and factors. For larger or more complex institutions, this may mean developing an appropriate stress testing and scenario testing framework.
4. The DFSAG does not prescribe any specific approach for the ICAAPG and, consequently, an Authorised FirmG can choose to implement an ICAAPG which is proportionate to the nature, size and complexity of the business activities.
5. In completing an ICAAPG , an Authorised FirmG should:
a. estimate the amount of capital required to absorb potential losses, if any, for the significant risks identified in the IRAPG (particularly risks which lead to financial losses);
b. perform reasonable and proportionate sensitivity tests to analyse the impact of variation in the risk parameters of significant risks identified in the IRAPG on the profitability and the capital position of the Authorised FirmG ;
c. estimate, using the range and distribution of possible losses estimated from historical data, the level of capital required reasonably to cover likely losses;
d. estimate the Capital ResourcesG required to address potential variation in the Authorised Firm'sG Capital RequirementG arising from planned growth in business levels or any significant deviation in growth from plans; and
e. document the ranges of capital required for each of the factors identified above and enable the Governing BodyG and the senior management to form an overall view on the amount and quality of capital which that Authorised FirmG should hold.
6. The DFSAG does not require an Authorised FirmG to implement ICAAPG through sophisticated models and the DFSAG has no prescribed approach for developing an internal capital model for the firm's ICAAPG assessment. However, an Authorised FirmG should be able to demonstrate:
a. the confidence levels set and whether these are linked to its corporate strategy;
b. the time horizons set for the different types of business that it undertakes;
c. the extent of historic data used and back-testing carried out;
d. that it has in place a process to verify the correctness of the model's outputs; and
e. that it has the skills and resources to operate, maintain and develop the model.
7. If an Authorised Firm'sG internal model makes explicit or implicit assumptions in relation to correlations within or between risk types, or in relation to diversification benefits between business lines, the firm should be able to explain to the DFSAG , with the support of empirical evidence, the basis of those assumptions. An Authorised Firm'sG model should also reflect the past experience of both the firm and the sectors in which it operates.
8. The assumptions required to aggregate risks that are modelled and the confidence levels adopted should be considered by the Authorised Firm'sG senior management. An Authorised FirmG should also consider whether any relevant risks, including systems and control risks, are not captured by the model.
9. An Authorised FirmG using an internal capital model should validate the assumptions of the model through a comprehensive stress testing programme. In particular this validation should:
a. test correlation assumptions (where risks are aggregated in this way) using combined stresses and scenario analyses;
b. use stress tests to identify the extent to which the firm's risk models omit non-linear effects, for instance the behaviour of derivatives in Market RiskG models; and
c. consider not just the effect of parallel shifts in interest rate curves, but also the effect of the curves becoming steeper or flatter.
10. Any internal assessment of capital adequacy should address diversification benefits and transferability of Capital ResourcesG between members of the Financial GroupG . It should also describe the distribution of the capital required by the Financial GroupG across all entities, including the Authorised FirmG .
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]