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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
Laws
Rulebook Modules
Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER33/02-19]
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Financial Markets Tribunal
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  • PIB 4 Credit Risk

    • Introduction

      • PIB 4 Guidance

        1. PIB chapter 4 deals with the prudential requirements relating to the management of Credit RiskG by an Authorised FirmG . Credit RiskG refers to risk of incurring losses due to failure on the part of a borrower or a counterparty to fulfil their obligations in respect of a financial transaction.
        2. This chapter aims to ensure that an Authorised FirmG holds sufficient regulatory capital of acceptable quality so that it can absorb unexpected losses arising out of its Credit RiskG exposures, should the need arise and that it continues to operate in a sustainable manner.
        3. This chapter requires an Authorised FirmG to:
        a. appropriately apply a risk-weight to all on-balance sheet assets and off-balance sheet exposures for capital adequacy purposes. A risk-weight is based on a Credit Quality GradeG aligned with the likelihood of counterparty default;
        b. calculate the Credit Risk Capital RequirementG for its on-balance sheet assets and off-balance sheet exposures; and
        c. reduce the Credit Risk Capital RequirementG for its on-balance sheet assets and off-balance sheet exposures where the exposure is covered fully or partly by some form of eligible Credit RiskG mitigant.
        4. PIB Appendix 4 provides detailed requirements, parameters, calculation methodologies and formulae in respect of the primary requirements outlined in PIB chapter 4.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 4 Part 1 — Application

      • PIB 4.1 Application

        • PIB 4.1.1

          This chapter applies to an Authorised FirmG in CategoryG 1, 2, 3A or 5.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.1.1 Guidance

            1. This chapter imposes systems and controls pertaining to Credit RiskG , and prescribes the manner of calculation of the Credit Risk Capital RequirementG (also referred to in this module as CRCOMG ).
            2. Rules PIB 3.8.2 and PIB 3.8.3 provide that the CRCOMG is a component in the calculation of the overall Risk Capital RequirementG of an Authorised FirmG , and that the CRCOMG is to be calculated in accordance with this PIB chapter 4.
            3. The RulesG in PIB section 4.8 provide that the Authorised Firm'sG CRCOMG is 8% of the Credit RWAG of the firm, which in turn is calculated as the sum of:
            a. the RWAG for Credit RiskG ExposuresG (CR ExposuresG ); and
            b. the RWAG for securitisation ExposuresG (SE ExposuresG ).
            4. This chapter sets out the manner in which each of those components must be calculated, monitored and controlled by an Authorised FirmG .
            5. In addition to complying with the applicable RulesG in this chapter, an Authorised FirmG investing in or holding Islamic ContractsG whether or not for the purpose of a PSIAG will need to take account of the provisions under IFRG RulesG IFR 5.4.6 and IFR 5.4.7 to calculate the Credit RiskG for those Islamic ContractsG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • PIB 4 Part 2 — Credit Risk Systems and Controls

      • PIB 4.2 Application of this part

        • PIB 4.2.1

          This part applies to an Authorised FirmG in CategoryG 1, 2, 3A or 5 with respect to both its Non-Trading BookG and Trading BookG transactions.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.3 Credit Risk Management Systems

        • PIB 4.3.1

          An Authorised FirmG must implement and maintain comprehensive Credit RiskG management systems which:

          (a) are appropriate to the firm's type, scope, complexity and scale of operations;
          (b) enable the firm to effectively identify, assess, monitor and control Credit RiskG and to ensure that adequate Capital ResourcesG are available to cover the risks assumed; and
          (c) ensure effective implementation of the Credit RiskG strategy and policy.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.1 Guidance

            1. Credit RiskG is the risk that a borrower or CounterpartyG fails to meet its obligations. It exists in both the Non-Trading BookG and the Trading BookG , and both on and off the balance sheet of an Authorised FirmG .
            2. Obviously, Credit RiskG arises from loans but there are other sources of Credit RiskG such as.
            a. trade finance and acceptances;
            b. interbank transactions;
            c. commitments and guarantees;
            d. interest rate, foreign exchange and Credit DerivativesG (including swaps, options, forward rate agreements and financial futures);
            e. bond and equity holdings; and
            f. settlement of transactions.
            3. The objective of the Credit RiskG management system must be to ensure that every Authorised FirmG holds adequate capital to cover Credit RiskG and absorb any potential losses arising from that risk. Since Authorised FirmsG need to provide credit as part of their usual business, this needs to be achieved by effectively managing the Credit RiskG assumed by the Authorised FirmG as part of its credit business.
            4. Failure to manage Credit RiskG effectively could cause an Authorised FirmG to face a situation of inadequate capital, which would threaten its safety and soundness. Such problems normally arise from:
            a. lax credit standards for borrowers and CounterpartiesG ;
            b. poor portfolio risk management; and
            c. failure to identify in good time changes in economic or other conditions that may impair the financial strength of borrowers and CounterpartiesG .
            5. Therefore, it is essential for Authorised FirmsG involved in the business of providing credit to design, implement and maintain comprehensive and effective systems to manage Credit RiskG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.2

          The Credit RiskG management framework of an Authorised FirmG must have at least the following principal elements effectively implemented to ensure that the Credit RiskG ExposuresG of the Authorised FirmG are of a sufficiently good quality:

          (a) an appropriate Credit RiskG environment, defined by a documented Credit RiskG strategy and a documented Credit RiskG policy;
          (b) application of the Credit RiskG strategy and policy, where appropriate, on a consolidated basis and at the level of individual subsidiaries;
          (c) sound processes for assuming and managing Credit RiskG ;
          (d) prudent lending controls and limits, including policies and processes for monitoring ExposuresG in relation to limits, and approvals of exceptions to limits;
          (e) adequate appropriately skilled human resources to manage the Credit RiskG function;
          (f) independence of credit approval and review functions from credit initiation functions to avoid any real or potential conflicts of interest;
          (g) prudent procedures for approving credits, defined by a documented credit procedures manual;
          (h) effective systems for credit administration, measurement and monitoring; and
          (i) adequate controls over Credit RiskG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.3

          (1) An Authorised FirmG must ensure that its Governing BodyG retains responsibility for the Credit RiskG management framework and ensure it is appropriate for the nature, scale and complexity of operations, in the context of prevailing market and macro-economic conditions.
          (2) An Authorised FirmG must ensure that its senior management or an appropriate designated body, regularly reviews and understands the implications as well as the limitations of the risk management information that they receive from the Credit RiskG management function, in order to evaluate the suitability and effectiveness of such information in enabling them to provide effective oversight over the Credit RiskG management function.
          (3) An Authorised FirmG must ensure that its Governing BodyG regularly reviews and understands the implications as well as the limitations of Credit RiskG management information and reports presented to it, to ensure that the contents and the format of such reports are suitable for effective Governing BodyG oversight.
          (4) An Authorised FirmG must ensure that its Governing BodyG is responsible for carrying out regular stress testing on the credit portfolio which is appropriate for the nature, scale and complexity of the Credit RisksG assumed by the Authorised FirmG . An Authorised FirmG must ensure that its Governing BodyG annually reviews the stress scenarios and takes action to address any perceived issues arising from those reviews.
          (5) An Authorised FirmG must establish and enforce internal controls and practices so that deviations from policies, procedures, limits and prudential guidelines are promptly reported to the appropriate level of management.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.3 Guidance

            1. An Authorised FirmG may structure its credit processes and Credit RiskG management function in a manner which suits its or its Group'sG internal organisational structure, culture and internal practices, provided the key functions and components relevant to Credit RiskG management, as mentioned above, are present, and there must be adequate segregation of functions responsible for critical Credit RiskG management processes. In particular, the credit initiation function must be independent of the credit approval and review functions to avoid any potential conflicts of interest. In cases where an Authorised FirmG finds it necessary to delegate small lending limits to staff in the front office for operational needs, there must be adequate safeguards, e.g. independent review of credits granted, to prevent abuse.
            2. An Authorised Firm'sG senior management or an appropriately delegated body (such as a credit committee) should be responsible for effectively implementing the Credit RiskG strategy and policy approved by the Governing BodyG of the Authorised FirmG . Senior management or such a credit committee will need to establish adequate procedures to identify, quantify, monitor and control the Credit RiskG inherent in the Authorised Firm'sG activities and at the level of both the overall portfolio and individual borrowers/CounterpartiesG .
            3. The appropriate level at which credit decisions are taken will vary according to the type of credit offered and the size and structure of the Authorised FirmG . For some Authorised FirmsG , a credit committee may be appropriate, with formal terms of reference laid down. In other Authorised FirmsG , individuals may be given pre-assigned authority limits. It will usually be appropriate for the final credit approval authority to be given by staff reporting independently from those staff interacting with clients.
            4. As part of its stress testing programme for Credit RiskG measurement, an Authorised FirmG should take into account the realistic recoveries available from security or CollateralG under stressed market and macro-economic conditions.
            5. PIB Rule 4.3.3 (3) requires the Governing BodyG of an Authorised FirmG to review the management information reports presented to it by the senior management of that firm and assess the reports in respect of their utility and effectiveness in enabling the Governing BodyG to effectively discharge their responsibilities towards effective oversight of the firm and its credit risk management.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.4

          An Authorised FirmG must also consider whether it is prudent to set out specific provisioning requirements for country and transfer risks to which it is exposed.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.4 Guidance

            GuidanceG on country and transfer risk ExposureG is set out in PIB section A4.1 (Credit RiskG systems and controls) in PIB App4.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.3.5

          Where an Authorised FirmG avails itself of Credit RiskG mitigations, the Authorised FirmG must have mechanisms in place to regularly assess the net realisable value of such mitigations taking into account prevailing market conditions.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.3.5 Guidance

            1. PIB section 4.13 sets out the principles and methodologies for the recognition of Credit RiskG mitigation in the calculation of Credit RWAG .
            2. Further GuidanceG on Credit RiskG systems and controls (including Credit RiskG mitigation), and on the specific areas which the Credit RiskG policy should cover, is set out in PIB section A4.1.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.4 Credit Risk Strategy, Policy, and Procedures Manual

        • Credit Risk Strategy

          • PIB 4.4.1

            (1) An Authorised FirmG must implement and maintain a Credit RiskG strategy, which prescribes its stated degree of risk tolerance, level of capital available for credit activities, business strategy for credit activities and Credit RiskG management approach.
            (2) The strategy must be:
            (a) documented;
            (b) approved by the Governing BodyG ; and
            (c) regularly reviewed and updated by the Authorised FirmG at periodic intervals and at least annually, as appropriate to the nature, scale and complexity of its activities.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.4.1 Guidance

              1. An Authorised Firm'sG Credit RiskG strategy should reflect the aim to achieve sound credit quality while ensuring profit and business growth. Therefore the Credit RiskG strategy should address the Authorised Firm'sG approach towards the decision on an acceptable level of risk/reward relationship, after taking into account resource and capital costs.
              2. An Authorised Firm'sG Credit RiskG strategy should allow for economic cycles and their effects on the credit portfolio during different stages of an economic cycle. For example, it should cater for a higher incidence of defaults in the personal loan and credit card portfolios in times of economic recession.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Risk Policy

          • PIB 4.4.2

            (1) An Authorised FirmG must implement and maintain a Credit RiskG policy which prescribes all the essential elements of the Credit RiskG management system and associated processes.
            (2) The policy must be:
            (a) documented;
            (b) approved by the Governing BodyG ; and
            (c) regularly reviewed and updated by the Authorised FirmG at periodic intervals and at least annually, as appropriate to the firm's current financial performance, credit market conditions in its main markets and its Capital ResourcesG position as well the firm's nature, scale and complexity of its activities.
            (3) Any changes to the Credit RiskG policy and how exceptions to the policy will be dealt with must be approved by the Governing BodyG or an appropriately delegated committee of senior management (such as a credit committee).
            (4) An Authorised FirmG with one or more branches outside the DIFCG must implement and maintain Credit RiskG policies adapted to each local market and its regulatory conditions.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.3

            The Credit RiskG policy must:

            (a) be consistent with the approved Credit RiskG strategy, considering a range of factors, including but not limited to an approved degree of risk tolerance, capital allocated to Credit RisksG , business strategy and market conditions in its main credit markets;
            (b) provide sound, well-defined Credit RiskG norms and criteria for approval of credit applications;
            (c) clearly specify the ExposureG limits, product types, business segments, nature of target borrowers and the nature of Credit RiskG that the Authorised FirmG wishes to incur;
            (d) set out, where appropriate, the amounts and terms and conditions under which CounterpartiesG or clients may be eligible or ineligible for credit;
            (e) include minimum information that is required to be obtained for processing an application for credit;
            (f) include well defined criteria and policies for approving new ExposuresG as well as renewing and refinancing existing ExposuresG , identifying the appropriate approval authority for the size and complexity of the ExposuresG ;
            (g) include effective credit administration policies, including continued analysis of a borrower's ability and willingness to repay under the terms of the debt, monitoring of documentation, legal covenants, contractual requirements and CollateralG , and a classification system that is consistent with the nature, size and complexity of the Authorised Firm'sG activities or, at the least, with the asset grading system prescribed in PIB Rule 4.5.4;
            (h) include comprehensive policies for reporting ExposuresG on an on-going basis;
            (i) include comprehensive policies for identifying and managing problem assets;
            (j) include a provisioning policy approved by the Governing BodyG which ensures that all loans are promptly and prudently provided for;
            (k) set out limits and approval processes involved for the approval of credit facilities that can be approved by the delegated authorities, and stipulate that the Governing BodyG retains responsibility for the governance of such limits;
            (l) require that major Credit RiskG ExposuresG exceeding a specified amount or at a minimum all Large ExposuresG of the Authorised FirmG are approved by the Authorised Firm'sG senior management or its designated body like credit committee; and
            (m) require that all Credit RiskG ExposuresG that are especially risky or inconsistent with the approved credit strategy of the Authorised FirmG are approved by the Authorised Firm'sG senior management or its designated body such as a credit committee.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.4

            In relation to conflicts of interest and Related PersonG transactions, the policy must:

            (a) set out adequate procedures for handling conflicts of interest relating to the provision and management of credit, including measures to prevent any PersonG directly or indirectly benefiting from the credit being part of the process of granting or managing the credit;
            (b) subject to PIB Rule 4.4.5, prohibit ExposuresG to Related PersonsG on terms that are more favourable than those available to PersonsG who are not Related PersonsG ; and
            (c) if ExposuresG to Related PersonsG are allowed on terms which are no more favourable than those available to PersonsG who are not Related PersonsG , set out procedures that:
            (i) require such ExposuresG , and any write-off of such ExposuresG , exceeding specific amounts or otherwise posing special risks to the Authorised FirmG , to be made subject to the prior written approval of the firm's Governing BodyG or the Governing Body'sG delegate; and
            (ii) exclude PersonsG directly or indirectly benefiting from the grant or write off of such ExposuresG being part of the approval process.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.5

            The prohibition in PIB Rule 4.4.4(b) does not apply to providing credit to a Related PersonG under a credit policy on terms (such as for credit assessment, tenor, interest rates, amortisation schedules and requirements for CollateralG ) that are more favourable than those on which it provides credit to PersonsG who are not Related PersonsG , provided the credit policy:

            (a) is an EmployeeG credit policy that is widely available to EmployeesG of the Authorised FirmG ;
            (b) is approved by the Authorised Firm'sG Governing BodyG or the Governing Body'sG delegate;
            (c) clearly sets out the terms, conditions and limits (both at individual and aggregate levels) on which credit is to be provided to such EmployeesG ; and
            (d) requires adequate mechanisms to ensure on-going compliance with the terms and conditions of that credit policy, including immediate reporting to the Governing BodyG or the Governing Body'sG delegate where there is a deviation from or a breach of the terms and conditions or procedures applicable to the provision of such credit for timely and appropriate action.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.4.5 Guidance

              1. The requirements in these RulesG do not prevent arrangements such as EmployeeG loan schemes that allow more favourable and flexible loan terms to EmployeesG of the Authorised FirmG than those available under its normal commercial arrangements. However, such a loan scheme must comply with the requirements set out in these RulesG , which are designed to address conflicts of interest that may arise in the grant, approval or management of such loans. Such conflicts are especially likely to arise where one or more of the EmployeesG concerned are DirectorsG , PartnersG or senior managers.
              2. Generally, where an Authorised FirmG has an EmployeeG loan scheme under these RulesG , the DFSAG expects its Governing BodyG to have ensured, before it or its delegate approved that scheme, that the terms, conditions and particularly limits (both at individual and aggregate level) on which credit is to be provided to EmployeesG under the scheme are adequate and effective in addressing the risks arising from such lending. The Authorised FirmG should also be able to demonstrate to the DFSAG that the procedures it has adopted relating to an EmployeeG loan scheme are adequate to address any risks arising from such lending. The DFSAG expects to have access to records relating to lending under an EmployeeG loan scheme upon request or during its supervisory visits. Any significant breach of or deviation from the procedures adopted in relation to an EmployeeG loan scheme may also trigger the reporting requirements to the DFSAG under GEN Rule 11.10.7.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.6

            For the purposes of the RulesG in this chapter, a PersonG is a "Related PersonG " of an Authorised FirmG if the PersonG :

            (a) is, or was in the past 2 years:
            (i) a member of a GroupG or PartnershipG in which the Authorised FirmG is or was also a member; or
            (ii) a ControllerG of the Authorised FirmG or a Close RelativeG of such a ControllerG ;
            (b) is, or was in the past 2 years, a DirectorG , PartnerG or senior manager of the Authorised FirmG or an entity referred to under (a)(i) or (ii), or a Close RelativeG of such a DirectorG , PartnerG or senior manager; or
            (c) is an entity in which a DirectorG , PartnerG or senior manager of the Authorised FirmG or an entity referred to in (a)(i) or (a)(ii), or a Close RelativeG of such a DirectorG , PartnerG or senior manager has a significant interest by:
            (i) holding 20% or more of the shares of that entity, or a ParentG of that entity, if that entity is a company; or
            (ii) being entitled to exercise 20% or more of the voting rights in respect of that entity;
            except that a PartnerG is not a Related PersonG where that PersonG is a limited partner of a Limited PartnershipG formed under the Limited PartnershipG Law of 2006 or any similar limited partnership constituted under the law of a country or territory outside the DIFCG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Procedures Manual

          • PIB 4.4.7

            An Authorised FirmG must implement and maintain a documented credit procedures manual, which sets out the criteria and procedures for granting new credits, for approving extensions of existing credits and exceptions, for conducting periodic and independent reviews of credits granted and for maintaining the records for credits granted.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.4.8

            The credit procedures manual must establish:

            (a) sound, well-defined criteria for granting credit, including a thorough understanding of the borrower or CounterpartyG , the purpose and structure of the credit and its source of repayment;
            (b) well defined processes for approving new ExposuresG as well as renewing and refinancing existing ExposuresG ;
            (c) effective credit administration processes, including continued analysis of a borrower's ability and willingness to repay under the terms of the debt, monitoring of documentation, legal covenants, contractual requirements and CollateralG ;
            (d) effective processes for classification and grading of credit assets consistent with the nature, size and complexity of the Authorised Firm'sG activities;
            (e) comprehensive processes for reporting ExposuresG on an ongoing basis; and
            (f) comprehensive processes for identifying problem assets, managing problem assets, monitoring their collections and for estimating required level of provisions.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.4.8 Guidance

              The same criteria should be applied to both advised and unadvised facilities and should deal with all Credit RisksG associated with the Authorised Firm'sG business whether in the Non-Trading or Trading BookG or on or off balance sheet.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.5 Processes for Credit Assessment

        • PIB 4.5.1

          (1) When utilising external credit rating agencies as part of its credit assessment processes, an Authorised FirmG must:
          (a) maintain an internal credit grading system; and
          (b) stress test its capital position on at least an annual basis to consider the capital implications to the Authorised FirmG of a significant reduction in the credit quality and associated reduction on credit ratings from credit rating agencies for its credit portfolio.
          (2) An Authorised FirmG must not solely use external credit rating agency credit ratings as a basis for its assessment of the risks associated with an ExposureG , in particular in respect of a Large ExposureG , and must at all times conduct its own credit assessment of such an ExposureG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.5.1 Guidance

            An Authorised FirmG should closely monitor the adequacy of the internal credit assessment processes, in order to assess whether there is an upward bias in internal ratings.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.2

          An Authorised FirmG must implement and maintain appropriate policies, processes, systems and controls to:

          (a) administer its credit portfolios, including keeping the credit files current, getting up-to-date financial information on borrowers and other CounterpartiesG , funds transfer, and electronic storage of important documents;
          (b) ensure that the valuations of Credit RiskG mitigants employed by the Authorised FirmG are up-to-date, including periodic assessment of Credit RiskG mitigants such as guarantees and CollateralG ;
          (c) review all material concentrations in its credit portfolio and report the findings of such reviews to the Governing BodyG ; and
          (d) measure Credit RiskG (including to measure Credit RiskG of off-balance sheet products such as DerivativesG in credit equivalent terms) and monitor the condition of individual credits to facilitate identification of problem credits and to determine the adequacy of provisions and reserves.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.3

          The Credit RiskG management system and, in particular, the systems, policies and processes aimed at classification of credits, monitoring and identification of problem credits, management of problem credits and provisioning for them must include all the on-balance sheet and off-balance sheet credit ExposuresG of the Authorised FirmG .

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.5.3 Guidance

            An Authorised FirmG should ensure that its loan portfolio is properly classified and has an effective early-warning system for problem loans.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.4

          (1) An Authorised FirmG must establish clearly defined criteria for identifying its problem credits and/or impaired assets which ensure that credits are classified as impaired in all cases where there is some reason to believe that all amounts due (including principal and interest) will, or may, not be collected in accordance with the contractual terms of the loan agreement.
          (2) For the purpose of (1), and subject to (3), an Authorised FirmG must categorise its credits into five categories as detailed in the following table, where credits in the substandard, doubtful and loss categories must be considered as problem credits:
          Standard includes credits with no element of uncertainty about timely repayment of the outstanding amounts, including principal and interest. Credits are currently in regular payment status with prompt payments.
          Special mention includes credits with deteriorating or potentially deteriorating credit quality which, may adversely affect the borrower's ability to make scheduled payments on time. The credits in this category warrant close attention by the Authorised FirmG .
          Substandard includes credits which exhibit definitive deterioration in credit quality and impaired debt servicing capacity of the borrower.
          Doubtful includes credits which show strong credit quality deterioration, worse than those in substandard category, to the extent that the prospect of full recovery of all the outstanding amounts from the credit is questionable and consequently the probability of a credit loss is high, though the exact amount of loss cannot be determined yet.
          Loss includes credits which are assessed as uncollectable and credits with very low potential for recoverability of amounts due.
          (3) An Authorised FirmG may also have in place a more detailed credit grading system provided it can address the categories detailed in (2).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.5.4 Guidance

            1. With respect to the ratings above, Authorised FirmsG should consider ExposuresG as classified special mention, substandard, doubtful and loss where the loans are contractually in arrears for a minimum number of days of 30, 60, 90-120 and 120-180 days respectively. Authorised FirmsG should also consider the treatments as set out in PIB Rule 4.5.7 (Evergreening).
            2. Credits exhibiting the following categories should be included in the special mention category.
            (a) a declining trend in the operations of the borrower or in the borrower's ability to continue to generate cash required for repayment of the credit;
            (b) any signals which indicate a potential weakness in the financial position of the borrower, but not to the point at which repayment capacity is definitely impaired; or
            (c) business, economic or market conditions that may unfavourably affect the profitability and business of the borrower in the near to medium term.
            3. Credits exhibiting the following categories should be included in the substandard category.
            (a) inability of the borrower to meet contractual repayment terms of the credit facility;
            (b) unfavourable economic and market conditions or operating problems that would affect the profitability and cash flow generation of the borrower;
            (c) weak financial condition or the inability of the borrower to generate sufficient cash flow to service the payments.;
            (d) difficulties experienced by the borrower in servicing its other debt obligations; or
            (e) breach of any financial covenants by the borrower.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.5

          An Authorised FirmG must have detailed policies, processes and resources for managing problem credits which address the following:

          (a) monitoring of credits and early identification of credit quality deterioration;
          (b) review of classification of problem credits; and
          (c) ongoing oversight of problem credits, and for collecting on past due obligations.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.6

          An Authorised FirmG must ensure that each and every credit which qualifies as a Large ExposureG and is classified as an impaired credit is managed individually. This includes valuation, classification and provisioning for such credits on an individual item basis.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.7

          Any evergreening exercise involving refinancing of past due credits must not result in their being classified as a higher category. In particular, impaired credits cannot be refinanced with the aim of classifying them as standard or special mention credits.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.8

          An Authorised Firm'sG provisioning policy must specify the following minimum provisioning requirements:

          (a) for substandard assets — 20% of the unsecured portion of the credit;
          (b) for doubtful assets — 50% of the unsecured portion of the credit; and
          (c) for loss assets — 100% of the unsecured portion of the credit.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.5.9

          An Authorised FirmG must, on a periodic basis, at a minimum monthly frequency, review its problem credits (at an individual level or at a portfolio level for credits with homogeneous characteristics) and review the asset classification, provisioning and write-offs for each of those problem credits.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 4 Part 3 — CRDOM

      • PIB 4.6 Application

        • PIB 4.6 Guidance

          1. As indicated in PIB Rule 4.1.1, this PIB chapter 4 (including this part 3) applies to Authorised FirmsG in CategoriesG 1, 2, 3A and 5. However, the provisions in this part are applied in a differentiated manner in that CategoryG 3A firms must, and CategoryG 2 firms may, use the Simplified ApproachG under PIB section 4.7.
          2. The Credit Risk Capital RequirementG (also referred to in this module as CRCOMG ) is a component of the calculation of the overall Capital RequirementG of an Authorised FirmG , as provided in Rules PIB 3.8.2 and PIB 3.8.3. The RulesG in this PIB 4 part 3, supplemented by PIB App4, govern the manner of calculation of the CRCOMG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.7 Simplified Approach

        • Category 3A Firms

          • PIB 4.7.1

            (1) This RuleG applies only to an Authorised FirmG in CategoryG 3A.
            (2) Subject to (3) and (4), an Authorised FirmG must apply the Simplified ApproachG as prescribed in PIB section A4.12 in PIB App4.
            (3) An Authorised FirmG is not required to apply the Simplified ApproachG if it obtains prior approval of the DFSAG not to do so.
            (4) After obtaining approval under (3), a firm must not revert to the Simplified ApproachG without further prior approval from the DFSAG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.7.1 Guidance

              1. In effect, the Simplified ApproachG reduces undue regulatory burden on CategoryG 3A firms to reflect more appropriately their risk profile.
              2. In relation to (3) and (4), the DFSAG may consider granting its approval for a change of approach if it is satisfied that there are no regulatory capital arbitrage opportunities. Firms should be able to demonstrate to the DFSAG solid and reasonable grounds to be able to move from one approach to the other. For instance, in assessing whether or not to grant approval, the DFSAG may consider whether or not there has been a material change in the business of the firm.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Category 2 Firms

          • PIB 4.7.2

            (1) This RuleG applies only to an Authorised FirmG in CategoryG 2.
            (2) Subject to (3) and (4), an Authorised FirmG may apply the Simplified ApproachG , as prescribed in PIB section A4.12 in PIB App4, upon obtaining prior approval to do so from the DFSAG .
            (3) After obtaining approval under (2), a firm must not disapply the Simplified ApproachG without further prior approval from the DFSAG .
            (4) The DFSAG may revoke its approval under (2) and require a firm to disapply the Simplified ApproachG , where the DFSAG considers that this is warranted by the firm's business model and risk profile.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.7.2 Guidance

              In relation to (3) and (4), the DFSAG may consider granting its approval for a change of approach if it is satisfied that there are no regulatory capital arbitrage opportunities. Firms should be able to demonstrate to the DFSAG solid and reasonable grounds to be able to move from one approach to the other. For instance, in assessing whether or not to grant approval, the DFSAG may consider whether or not there has been a material change in the business of the firm.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.8 Calculation of the Crcom

        • PIB 4.8.1

          (1) The Credit Risk Capital RequirementG is calculated as follows:
          CRCOMG = 8% x Credit RWAG
          (2) The Credit RWAG of an Authorised FirmG is the sum of:
          (a) its risk weighted assets (RWAG ) for all its Credit RiskG ExposuresG (referred to in this module as "CR ExposuresG ") calculated in accordance with Rules PIB 4.8.2 and PIB 4.8.3;
          (b) its RWAG for all its securitisation ExposuresG (referred to in this module as "SE ExposuresG ") calculated in accordance with PIB Rule 4.8.4 and PIB section 4.14; and
          (c) its RWAG for its Counterparty RiskG ExposuresG as calculated in accordance with sections PIB A4.6 to PIB A4.8.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

        • Calculation of RWA for Credit Risk Exposures (CR Exposures)

          • PIB 4.8.2

            An Authorised FirmG must include in its calculation of RWAG for CR ExposuresG :

            (a) any on-balance sheet asset; and
            (b) any off-balance sheet item;

            but excluding:

            (c) any SE ExposureG ;
            (d) any securitised ExposureG that meets the requirements for the recognition of risk transference in a Traditional SecuritisationG set out in PIB section 4.14; or
            (e) any ExposureG classified as a position or instrument in the Trading BookG in accordance with PIB section A2.1.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.8.3

            To calculate its RWAG for CR ExposuresG , an Authorised FirmG must:

            (a) calculate the value of the ExposureG (represented as "E") for every on-balance sheet and every off-balance sheet asset in accordance with the ExposureG measurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit RiskG mitigation;
            (b) categorise that ExposureG in accordance with the RulesG in PIB section 4.10;
            (c) allocate an applicable Credit Quality GradeG and risk weight for that ExposureG in accordance with the RulesG in section PIB 4.11 and PIB 4.12;
            (d) calculate the RWAG amount for that ExposureG using the following formula:
            RWA(CR) = E x CRW
            where:
            (i) "RWA(CR)" refers to the risk-weighted ExposureG amount for that CR ExposureG ;
            (ii) "E" refers to the ExposureG value or amount, for that CR ExposureG ; and
            (iii) "CRW" refers to the applicable risk weight for that CR ExposureG determined in accordance with (b) and (c); and
            (e) add the RWAG amounts calculated in accordance with (d) for all its CR ExposuresG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of RWA for Securitisation Exposures (SE Exposures)

          • PIB 4.8.4

            To calculate its RWAG for all its SE ExposuresG , an Authorised FirmG must:

            (a) calculate the value of the ExposureG for each of its SE ExposuresG in accordance with ExposureG measurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit RiskG mitigation;
            (b) allocate an applicable Credit Quality GradeG for that SE ExposureG in accordance with the RulesG in PIB section 4.11;
            (c) calculate the RWAG amount for each SE ExposureG , except for those SE ExposuresG which the Authorised FirmG is required to include as deductions from any component of Capital ResourcesG , using the following formula:
            RWA(SE) = SE x CRW
            where:
            (i) "RWA(SE)" refers to the risk-weighted ExposureG amount for that securitisation ExposureG ;
            (ii) "SE" refers to the ExposureG value or amount for that SE ExposureG calculated in accordance with (a); and
            (iii) "CRW" refers to the applicable risk weight for that SE ExposureG determined in accordance with (b); and
            (d) add the RWAG amounts calculated in accordance with (c) for all its SE ExposuresG to the RWAG amounts calculated in accordance with PIB Rule 4.8.5 in respect of its Early AmortisationG ExposuresG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.8.5

            To calculate its RWAG for Early AmortisationG ExposuresG , an Authorised FirmG must:

            (a) calculate the value of the ExposureG (EAE) for each of its Early AmortisationG ExposuresG in accordance with ExposureG measurement methodology specified in PIB section 4.9 and recognising the effects of any applicable Credit RiskG mitigation;
            (b) calculate the risk-weighted ExposureG amount for each Early AmortisationG ExposureG using the following formula:
            RWA(EAE) = EAE x CRW
            where:
            (i) "RWA(EAE)" refers to the risk-weighted ExposureG amount for that Early AmortisationG ExposureG ;
            (ii) "EAE" refers to the ExposureG value or amount, for that Early AmortisationG ExposureG calculated in accordance with (a); and
            (iii) "CRW" refers to the applicable risk weight for the underlying ExposureG type as if the ExposureG had not been securitised; and
            (c) add the RWAG amounts calculated in accordance with (b) for all its Early AmortisationG ExposuresG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.8.6

            The aggregate RWAG amount for all of the SE ExposuresG of an Authorised FirmG to a securitisation and ExposuresG arising from Credit RiskG mitigation applied to those SE ExposuresG must not exceed the aggregate RWAG amount corresponding to the underlying ExposuresG of the securitisation had they been on the balance sheet of the Authorised FirmG and included in the calculation of the Credit RWAG of the Authorised FirmG . For avoidance of doubt, the aggregate RWAG amount must not include any deduction for a gain-on-sale or a Credit-Enhancing Interest-Only StripG arising from the securitisation.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.9 Methodology for Measurement of Exposures

        • PIB 4.9.1

          An Authorised FirmG must apply the ExposureG measurement methodology set out in the RulesG in this part to calculate the value or amount of an ExposureG for any CR ExposureG or SE ExposureG .

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.1 Guidance

            1. The measurement methodology in this section prescribes the manner of calculation of ExposuresG for the purpose of determining the Credit RWAG for Credit RiskG (CR) ExposuresG as provided in PIB Rule 4.8.3 and for securitisation (SE) ExposuresG as provided in PIB Rule 4.8.4.
            2. Due regard should be given to the GuidanceG relating to prudent valuation in PIB section 2.4 and related provisions in PIB A2.5.
            3. An Authorised FirmG should consult with the DFSAG on the appropriate treatment to apply in the measurement of E, for transactions that have not been addressed in this part.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.9.2

          An Authorised FirmG must calculate E for any CR ExposureG or SE ExposureG , net of any individual impairment provision attributable to such ExposuresG , as determined in accordance with the International Financial Reporting StandardsG .

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for On-Balance Sheet Assets

          • PIB 4.9.3

            For each on-balance sheet asset, E should be the carrying value of the asset as determined in accordance with the International Financial Reporting StandardsG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.9.3 Guidance

              1. For any asset, E should be equal to the fair value of that asset presented in the balance sheet except that:
              a. for any asset held at cost, E, should be equal to the cost of the asset presented in the balance sheet; and
              b. for any available-for-sale (AFS) debt security or AFS loan, E, should be equal to the fair value less provision for impairment of that AFS debt security or AFS loan, adjusted by deducting any unrealised fair value gains and adding back any unrealised fair value losses on revaluation (broadly equivalent to the amortised cost of the AFS debt security or AFS loan less any provision for impairment).
              2. In the case of a lease where the Authorised FirmG is exposed to residual value risk (i.e. potential loss due to the fair value of the leased asset declining below the estimate of its residual value reflected on the balance sheet of the Authorised FirmG at lease inception), the Authorised FirmG should calculate (i) an ExposureG to the lessee equivalent to the discounted lease payment stream; and (ii) an ExposureG to the residual value of the leased assets equivalent to the estimate of the residual value reflected in the balance sheet of the Authorised FirmG .
              3. Any foreign exchange transaction or translation gain or loss from a foreign currency-denominated on-balance sheet item as well as interest earned on a fixed income instrument should be allocated to the ExposureG to which it accrues.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Off-Balance Sheet Items Other than Counterparty Risk Exposures

          • PIB 4.9.4

            (1) For each off-balance sheet item other than a pre-settlement CounterpartyG ExposureG arising from an OTC DerivativeG transaction, long settlement transaction or securities financing transaction (referred to in PIBG as an "SFT"), an Authorised FirmG must calculate E by:
            (a) in the case of an Early AmortisationG ExposureG , multiplying the amount of investors' interest by the applicable CCF set out in Rules PIB A4.2.1 and PIB A4.2.2 in PIB App4; and
            (b) in all other cases, multiplying the notional amount of each item by:
            (i) the applicable CCF set out in PIB Rule A4.2.1 in PIB App4 if that item is a CR ExposureG ; or
            (ii) the applicable CCF set out in PIB Rule A4.2.2 in PIB App4 if that item is an SE ExposureG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.9.4 Guidance

              1. An Authorised FirmG which is exposed to the risk of the underlying SecuritiesG in an OTC DerivativeG transaction, long settlement transaction or SFT which is in substance similar to a forward purchase or credit substitute should calculate E, for such an ExposureG , in accordance with PIB Rule 4.9.4(1).
              2. Investors' interest is defined as the sum of:
              a. investors' drawn balances related to the securitised ExposuresG ; and
              b. E associated with investors' undrawn balances related to the SE ExposuresG . E is determined by allocating the undrawn balances of securitised ExposuresG on a pro-rata basis based on the proportions of the Originator'sG and investor shares of the securitised drawn balances.
              3. For avoidance of doubt, where an Authorised FirmG has provided unfunded credit protection via a total rate of return swap, E should be equal to the notional amount of the underlying reference credit for which the Authorised FirmG is providing protection adjusted for any payments received from or made to the protection buyer and recognised in the profit and loss account of the Authorised FirmG . Where an Authorised FirmG has provided unfunded credit protection via a credit default swap, E should be equal to the notional amount of the underlying reference credit for which the Authorised FirmG is providing protection.
              4. The notional amount of an off-balance sheet item refers to the amount which has been committed but is as yet undrawn. The amount to which the CCF is applied is the lower of the value of the unused committed credit line, and the value which reflects any possible constraining availability of the facility, such as the existence of a ceiling on the potential lending amount which is related to an obligor's reported cash flow. If the facility is constrained in this way, the Authorised FirmG must have sufficient line monitoring and management procedures to support this contention.
              5. Any foreign exchange transaction or translation gain or loss from a foreign currency-denominated off-balance sheet item should be allocated to the ExposureG to which it accrues.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Eligible Financial Collateral for On-Balance Sheet Assets and Off-Balance Sheet Items Other Than Counterparty Exposures

          • PIB 4.9.5

            (1) An Authorised FirmG which has taken eligible financial CollateralG for any transaction other than an equity ExposureG , an SE ExposureG , an OTC DerivativeG transaction, long settlement transaction or SFT may recognise the effect of such CollateralG in accordance with Rules PIB 4.9.6 and PIB 4.9.7.
            (2) An Authorised FirmG must use either the:
            (a) Financial CollateralG Simplified ApproachG (FCSA) which adopts the treatment under PIB Rule 4.13.5 in relation to the composition of financial CollateralG ; or
            (b) Financial CollateralG Comprehensive Approach (FCCA) which adopts the treatment under PIB Rule 4.13.6;
            to recognise the effect of eligible financial CollateralG .
            (3) An Authorised FirmG must apply the chosen approach consistently to its entire Non-Trading BookG and must not use a combination of both approaches.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.6

            An Authorised FirmG using the FCSA may recognise the effect of eligible financial CollateralG in accordance with the RulesG in PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.7

            An Authorised FirmG using the FCCA may calculate the CR ExposureG adjusted for eligible financial CollateralG (referred to in PIBG as "E*"), in accordance with RulesG in PIB section A4.3 of PIB App4 and substitute E* for E when calculating the Credit RiskG -weighted ExposureG amount for that CR ExposureG under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Eligible Financial Collateral for Securitisation (SE) Exposures

          • PIB 4.9.8

            An Authorised FirmG that has taken eligible financial CollateralG for an SE ExposureG may recognise the effect of such CollateralG in accordance with Rules PIB 4.9.9 to PIB 4.9.11.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.9

            An Authorised FirmG calculating RWAsG for SE ExposuresG must use either the FCSA or the FCCA approaches to recognise the effect of eligible financial CollateralG . An Authorised FirmG must apply the chosen approach consistently to the entire Non-Trading BookG and must not use a combination of both approaches.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.10

            An Authorised FirmG using the FCSA approach for an SE ExposureG may recognise the effect of eligible financial CollateralG in accordance with PIB section 4.13 and PIB Rule 4.14.70.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.11

            An Authorised FirmG using the FCCA approach for an SE ExposureG must calculate E*, the SE ExposureG adjusted for eligible financial CollateralG , in accordance with Rules in PIB section A4.3 of PIB App4 and substitute E* for E when calculating the RWAG for SE ExposureG under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Counterparty Exposures

          • PIB 4.9.11 Guidance

            Rules PIB 4.19.12 to PIB 4.19.21 should be read in conjunction with sections PIB A4.6 to PIB A4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Counterparty Exposures Arising from OTC Derivative Transactions and Long Settlement Transactions

          • PIB 4.9.12

            For each OTC DerivativeG transaction or long settlement transaction which is not covered by a qualifying cross-product NettingG agreement, an Authorised FirmG should calculate E for the pre-settlement CounterpartyG ExposureG arising from that OTC DerivativeG transaction or long settlement transaction using the method set out in sections PIB A4.6 to PIB A4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Measurement of E for Pre-Settlement Counterparty Exposures Arising from SFTs

          • PIB 4.9.13

            An SFT must be treated as CollateralisedG lending, notwithstanding the wide range of structures which could be used for SFTs.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.14

            An Authorised FirmG must calculate E, for a pre-settlement CounterpartyG ExposureG arising from an SFT, other than an ExposureG covered by a qualifying cross-product NettingG agreement, in accordance with Rules PIB 4.9.15 to PIB 4.9.20.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.15

            An Authorised FirmG must determine E, for a pre-settlement CounterpartyG ExposureG arising from an SFT which is not covered by a qualifying cross-product NettingG agreement as follows:

            (a) in the case where the Authorised FirmG has lent SecuritiesG to a CounterpartyG or sold SecuritiesG to a CounterpartyG with a commitment to repurchase those SecuritiesG at a specified price on a specified future date, the latest fair value of the SecuritiesG lent or sold; and
            (b) in the case where the Authorised FirmG has lent cash to a CounterpartyG through the borrowing of SecuritiesG from the CounterpartyG or paid cash for the purchase of SecuritiesG from a CounterpartyG with a commitment to resell those SecuritiesG at a specified price on a specified future date, the amount of cash lent or paid.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.16

            An Authorised FirmG which has taken eligible financial CollateralG for any SFT where the pre-settlement CounterpartyG ExposureG is determined in accordance with PIB Rule 4.9.15 may recognise the effect of such CollateralG in accordance with Rules PIB 4.9.17 to PIB 4.9.20.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.17

            An Authorised FirmG must use either the FCSA or the FCCA to recognise the effect of eligible financial CollateralG for any SFT in the Non-Trading BookG . The Authorised FirmG must apply the chosen approach consistently to the entire Non-Trading BookG and must not use a combination of both approaches. For a pre-settlement CounterpartyG ExposureG arising from any SFT in the Trading BookG , an Authorised FirmG must only use the FCCA to recognise the effect of eligible financial CollateralG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.18

            An Authorised FirmG using the FCSA may recognise the effect of eligible financial CollateralG for any SFT in accordance with Rules PIB A4.3.27 to PIB A4.3.29 in PIB App4.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.19

            An Authorised FirmG which has taken eligible financial CollateralG for any SFT that is not covered by a qualifying bilateral NettingG agreement and using the FCCA, must calculate E* in accordance with Rules PIB A4.3.2 to PIB A4.3.6 in PIB App4, and substitute E* for E when calculating the Credit RiskG -weighted ExposureG amount for that CR ExposureG under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.9.20

            An Authorised FirmG which has taken eligible financial CollateralG for an SFT that is covered by a qualifying bilateral NettingG agreement and using the FCCA, must calculate E* for all its CR ExposuresG to any single CounterpartyG covered by the qualifying bilateral NettingG agreement, in accordance with Rules PIB A4.3.2 to PIB A4.3.6 in PIB App4 (if the Authorised FirmG is using supervisory haircuts or own-estimate haircuts), and substitute E* for E when calculating the Credit RiskG -weighted ExposureG amount for its CR ExposuresG to that CounterpartyG under PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exceptions to the Measurement of E

          • PIB 4.9.21

            An Authorised FirmG may attribute a value of zero to E for:

            (a) any pre-settlement CounterpartyG ExposureG arising from any DerivativeG transaction or SFT outstanding with a CCPe and which has not been rejected by that CCP, provided that the ExposureG is fully CollateralisedG on a daily basis;
            (b) any Credit RiskG ExposureG arising from any DerivativeG transaction, SFT or spot transaction which an Authorised FirmG has outstanding with a CCP for which the latter acts as a custodian on the Authorised Firm'sG behalf, provided that the ExposureG is fully CollateralisedG on a daily basis;
            (c) any pre-settlement CounterpartyG ExposureG arising from any Credit DerivativeG which an Authorised FirmG may recognise as eligible credit protection for a Non-Trading BookG ExposureG or another CCR ExposureG ; and
            (d) any pre-settlement CounterpartyG ExposureG arising from any sold credit default swap in the Non-Trading BookG , where the credit default swap is treated as credit protection sold by the Authorised FirmG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.9.21 Guidance

              Credit RiskG (CR) ExposuresG outstanding with a CCP would, for example, include credit ExposuresG arising from monies placed and from CollateralG posted, with the CounterpartyG .

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.10 Categorisation of Credit Risk Exposures (CR Exposures)

        • PIB 4.10 Guidance

          This section categorises ExposuresG for the purpose of determining the CRW for CR ExposuresG , as provided in PIB Rule 4.8.3.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.10.1

          An Authorised FirmG must categorise any CR ExposureG that is not past due for more than 90 days into one of the following asset classes:

          (a) cash items, which consist of:
          (i) cash and cash equivalents;
          (ii) gold bullion held in the vaults of the Authorised FirmG or on an allocated basis in the vaults of another entity to the extent that it is backed by gold bullion liabilities; and
          (iii) all receivable funds arising from transactions that are settled on a DvP basis which are outstanding up to and including the 4th business day after the settlement date;
          (b) central government and Central BankG asset class, which consists of any CR ExposureG to a central government or Central BankG ;
          (c) the PSE asset class, which consists of any CR ExposureG to a PSE;
          (d) the MDB asset class, which consists of any CR ExposureG to an MDB;
          (e) bank asset class, which consists of any CR ExposureG to a banking institution;
          (f) corporate asset class, which consists of any CR ExposureG to any corporation, partnership, sole proprietorship or trustee in respect of a trust, other than ExposuresG categorised in sub-paragraphs (a) to (e), (g) and (h);
          (g) regulatory retail asset class, which consists of any CR ExposureG meeting all of the following conditions:
          (i) the ExposureG is to an individual, a group of individuals, or a small business;
          (ii) the ExposureG takes the form of any of the following:
          (A) revolving credit and lines of credit, including credit cards and overdrafts;
          (B) personal term loans and leases, including instalment loans, vehicle loans and leases, student and educational loans;
          (C) small business credit facilities and commitments; or
          (D) any other product which the DFSAG may specify from time to time;
          (iii) the ExposureG is one of a sufficient number of ExposuresG with similar characteristics such that the risks associated with such lending are reduced; and
          (iv) the total ExposureG to any obligor or group of obligors is not more than $2 million;
          (h) residential mortgage asset class, which consists of any CR ExposureG meeting all of the following conditions:
          (i) the ExposureG is to an individual or a group of individuals, or if the ExposureG is to an entity other than an individual, the Authorised FirmG can demonstrate to the DFSAG (if required to do so) that it has robust processes to ascertain that the ExposureG is structured to replicate the risk profile of an ExposureG to an individual or a group of individuals and that it is able to identify and manage the legal risks that arise in such structures;
          (ii) the ExposureG is secured against a first lien mortgage:
          (A) of a completed residential property; or
          (B) on an exceptional basis of an uncompleted residential property in a jurisdiction approved by the DFSAG ;
          (iii) the ExposureG is not classified as an impaired asset in accordance with RulesG in this module; and
          (iv) the ExposureG is not to a corporation, partnership, sole proprietorship or trustee in respect of a trust where such corporation, partnership, sole proprietorship or trust is engaged in residential building, development or management;
          (i) the commercial real estate asset class, which consists of any CR ExposureG meeting all of the following conditions:
          (i) the ExposureG is to a corporation, partnership, sole proprietorship or trustee in respect of a trust; and
          (ii) the ExposureG is secured by commercial real estate; or
          (j) other ExposuresG asset class, which consists of any CR ExposureG which does not fall within any of the categories in sub-paragraphs (a) to (i).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.10.1 Guidance

            The ExposuresG listed under item (f) include transactions settled on a payment-versus-payment basis. For avoidance of doubt, the DFSAG expects that a CR ExposureG to a securities firm should be categorised within the corporate asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.11 Credit Quality Grade and External Credit Assessments

        • PIB 4.11 Guidance

          This section governs credit assessments of ExposuresG for the purpose of determining the CRW for Credit RiskG (CR) ExposuresG as provided in PIB Rule 4.8.3 and for securitisation (SE) ExposuresG as provided in PIB Rule 4.8.4.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.1

          An Authorised FirmG must assign a CR ExposureG to a Credit Quality GradeG based on the external credit assessment that is applicable to the CR ExposureG in accordance with tables mapping the ratings from an ECAIG to Credit Quality GradesG , which will be published by the DFSAG .

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.2

          An Authorised FirmG must only use an external credit assessment which is accessible to the public. An Authorised FirmG may not use a credit assessment that is made available only to the parties to a transaction.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.3

          An Authorised FirmG must only use external credit assessments by a recognised ECAIG . The DFSAG may impose conditions on the use of such external credit assessments.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.4

          An Authorised FirmG must use its chosen recognised external credit rating agencies and their external credit assessments consistently for each type of ExposureG , for both risk weighting and risk management purposes. Where an Authorised FirmG has two external credit assessments which map into different Credit Quality GradesG , it must assign the CR ExposureG to the Credit Quality GradeG associated with the higher risk weight. Where an Authorised FirmG has three or more external credit assessments which map into two or more different Credit Quality GradesG , it must assign the CR ExposureG to the Credit Quality GradeG associated with the higher of the two lowest risk weights.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.11.4 Guidance

            For illustration, if there are three external credit assessments mapping into Credit Quality GradesG with risk weights of 0%, 20% and 50%, then the applicable risk weight is 20%. If the external credit assessments map into Credit Quality GradesG with risk weights of 20%, 50% and 50%, then the applicable risk weight is 50%.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.5

          An Authorised FirmG must not recognise the effects of Credit RiskG mitigation if such mitigation is already reflected in the issue-specific external credit assessment of the CR ExposureG .

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.6

          Where a CR ExposureG has an issue-specific external credit assessment from a recognised ECAIG , an Authorised FirmG must use such assessment. Where a CR ExposureG does not have an issue-specific external credit assessment, an Authorised FirmG must:

          (a) if there is an issue-specific external credit assessment for another ExposureG to the same obligor, use the issue-specific assessment for the other ExposureG only if the ExposureG without an issue-specific assessment ranks pari passu with or is senior to the ExposureG with the issue-specific assessment;
          (b) if the obligor has an IssuerG external credit assessment, use the IssuerG assessment of the obligor only if the ExposureG without an issue-specific assessment ranks pari passu with or is senior to any unsecured claim that is not subordinated to any other claim on the obligor; or
          (c) in all other cases, apply a risk weight equal to the higher of the risk weight that is applicable to an unrated ExposureG and the risk weight associated with the external credit assessment, if any, of the obligor or another ExposureG to the same obligor.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.7

          Where a CR ExposureG is risk-weighted in accordance with PIB Rule 4.11.6(a) or (b), an Authorised FirmG may use a domestic currency external credit assessment only if the CR ExposureG is denominated in that domestic currency.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.8

          An Authorised FirmG may use an external credit assessment to risk weight a CR ExposureG only if the external credit assessment has taken into account and reflects the entire amount of Credit RiskG ExposureG the Authorised FirmG has with regard to all payments owed to it.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.11.9

          An Authorised FirmG must not use unsolicited external credit assessments to assign any CR ExposureG to a Credit Quality GradeG , unless:

          (a) it has assessed the quality of the unsolicited external credit assessments that it intends to use and is satisfied that these are comparable in performance with solicited external credit assessments and maintains relevant records and documents to be made available to the DFSAG upon request; and
          (b) it uses unsolicited external credit assessments consistently for each type of ExposuresG , for both risk weighting and risk management purposes.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.12 Risk Weights

        • PIB 4.12.1

          An Authorised FirmG with a CR ExposureG must:

          (a) for a CR ExposureG that is not past due for more than 90 days, determine the applicable risk weight in accordance with Rules PIB 4.12.2 to PIB 4.12.23;
          (b) for a CR ExposureG that is past due for more than 90 days, determine the applicable risk weight in accordance with Rules PIB 4.12.24 to PIB 4.12.26; and
          (c) for a CR ExposureG arising from an Unsettled TransactionG , determine the applicable risk weight in accordance with Rules PIB A4.6.5 to PIB A4.6.8.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.1 Guidance

            Where a CR ExposureG which is not past due has a Credit Quality GradeG which corresponds to a risk weight of 150%, an Authorised FirmG may apply the appropriate treatment and risk weights set out in Rules PIB 4.12.24 to PIB 4.12.26.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Cash Items

          • PIB 4.12.2

            Subject to PIB Rule 4.12.3, an Authorised FirmG may apply a 0% risk weight to any CR ExposureG categorised as a cash item.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.3

            An Authorised FirmG must apply a 20% risk weight to cheques, drafts and other items drawn on other banking institutions that are either payable immediately upon presentation or that are in the process of collection.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Central Government and Central Bank Asset Class

          • PIB 4.12.4

            Subject to PIB Rule 4.12.5, an Authorised FirmG must risk-weight any CR ExposureG in the central government and Central BankG asset class in accordance with the table below.

            Risk weights for the central government and Central BankG asset class

            Credit Quality GradeG 1 2 3 4 5 6 Unrated
            Risk WeightG 0% 20% 50% 100% 100% 150% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.5

            An Authorised FirmG may apply a 0% risk weight to any CR ExposureG to central governments or central banks of a GCC member country which are denominated and funded in the domestic currency of the GCC member country. For the purposes of this RuleG , individual Emirates of the UAEG will be considered as though they were GCC member countries.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Public Sector Enterprises (PSE) Asset Class

          • PIB 4.12.6

            (1) Subject to PIB Rule 4.12.8, an Authorised FirmG must risk-weight any CR ExposureG in the PSE asset class in accordance with the following table:

            Risk WeightsG for the PSE asset class
            Credit Quality GradeG 1 2 3 4 5 6 Unrated
            Risk WeightG 20% 50% 100% 100% 100% 150% 100%
            (2) In (1), sovereign PSEs in the UAEG and GCC that exhibit Credit RisksG comparable to their central government must be treated in accordance with the requirements set out in PIB Rule 4.12.5.
            (3) For the purposes of this Rule, a sovereign PSE is a PSE which has been designated as such by its national authorities.
            (4) Any foreign currency claims on sovereign PSEs which are determined to meet the conditions of (2) must be treated as one grade less favourable than the risk weight allocated in accordance with Rules PIB 4.12.4 and PIB 4.12.5.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.12.6 Guidance

              Any PSE which exhibits risk characteristics of a commercial enterprise should be treated in accordance with Rules PIB 4.12.13 to PIB 4.12.15.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Multilateral Development Bank (MDB) Asset Class

          • PIB 4.12.7

            Subject to Rules PIB 4.12.8 and PIB 4.12.9, an Authorised FirmG must risk-weight any CR ExposureG in the MDB asset class in accordance with the following table:

            Risk WeightsG for the MDB asset class

            Credit Quality GradeG 1 2 3 4 5 6 Unrated
            Risk WeightG 0% 50% 50% 100% 100% 150% 50%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.8

            An Authorised FirmG must apply a 0% risk weight to any CR ExposureG to the qualifying MDBs set out below:

            (a) The World BankG GroupG comprised of the International BankG for Reconstruction and Development (IBRD), the Multilateral InvestmentG Guarantee Agency (MIGA), and the International Finance Corporation (IFC);
            (b) The Asian Development BankG (ADB);
            (c) The African Development BankG (AfDB);
            (d) The European BankG for Reconstruction and Development (EBRD);
            (e) The Inter-American Development BankG (IADB);
            (f) The European InvestmentG BankG (EIB);
            (g) The European InvestmentG FundG (EIF);
            (h) The Nordic InvestmentG BankG (NIB);
            (i) The Caribbean Development BankG (CDB);
            (j) The Islamic Development BankG (IDB); and
            (k) The CouncilG of Europe Development BankG (CEDB).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.9

            An Authorised FirmG must apply a 0% risk weight to any CR ExposureG to the BankG for International Settlements, the International Monetary FundG , the European Central BankG , the European CommissionG , or the European Stability Mechanism.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
            [Amended] DFSA RM215/2018 (Made 22nd February 2018). [VER31/04-18]

        • Bank Asset Class

          • PIB 4.12.10

            Subject to Rules PIB 4.12.11 and PIB 4.12.12, an Authorised FirmG must risk-weight any CR ExposureG in the bank asset class in accordance with the following table:

            CRWs for the bank asset class

            Credit Quality GradeG 1 2 3 4 5 6 Unrated
            Risk WeightG 20% 50% 50% 100% 100% 150% 50%
            Risk WeightG for Short-Term ExposuresG 20% 20% 20% 50% 50% 150% 20%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.12.10 Guidance

              For the purposes of the above table, short-term ExposuresG refer to ExposuresG with an Original MaturityG of three months or less and that are not expected to be rolled over.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.11

            An Authorised FirmG must risk-weight any short-term CR ExposureG in the bank asset class with an issue-specific external credit assessment in accordance with the following table.

            CRWs for short-term CR ExposuresG in the bank asset class with issue-specific external credit assessments

            Short-Term Credit Quality GradeG I II III IV
            Risk WeightG 20% 50% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.12

            The CRW for any CR ExposureG in the bank asset class that does not have an external credit assessment by a recognised external credit rating agency must be the risk weight determined in accordance with the table in PIB Rule 4.12.10 or the risk weight that is applicable to an CR ExposureG to the central government of the jurisdiction in which the banking institution is incorporated or established, whichever is higher. If a short-term CR ExposureG in the bank asset class with an issue-specific external credit assessment:

            (a) attracts a risk weight of 50% or 100%, then the Authorised FirmG must apply a risk weight of not lower than 100% to any unrated short-term CR ExposureG to the same banking institution; or
            (b) attracts a risk weight of 150%, then the Authorised FirmG must apply a risk weight of 150% to any unrated CR ExposureG (whether long-term or short-term) to the same banking institution.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Corporate Asset Class

          • PIB 4.12.13

            Subject to Rules PIB 4.12.14 and PIB 4.12.15, an Authorised FirmG must risk-weight any CR ExposureG in the corporate asset class in accordance with the following table:

            Risk WeightsG for the corporate asset class

            Credit Quality GradeG 1 2 3 4 5 6 Unrated
            Risk WeightG 20% 50% 100% 100% 150% 150% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.14

            An Authorised FirmG must risk-weight any short-term CR ExposureG in the corporate asset class with an issue-specific external credit assessment in accordance with the following table:

            Risk WeightsG for short-term CR ExposuresG in the corporate asset class with issue-specific external credit assessments.

            Short-Term Credit Quality GradeG I II III IV
            Risk WeightG 20% 50% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.15

            The risk weight for any CR ExposureG in the corporate asset class that does not have an external credit assessment by a recognised external credit rating agency must be the risk weight determined in accordance with the table under PIB Rule 4.12.13 or the risk weight that is applicable to an CR ExposureG to the central government of the jurisdiction in which the corporate is incorporated or established, whichever is higher. If a short-term CR ExposureG in the corporate asset class with an issue-specific external credit assessment:

            (a) attracts a risk weight of 50% or 100%, then the Authorised FirmG must apply a risk weight of not lower than 100% to any unrated short-term CR ExposureG to the same corporate; or
            (b) attracts a risk weight of 150%, then the Authorised FirmG must apply a risk weight of 150% to any unrated CR ExposureG (whether long-term or short-term) to the same corporate.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Regulatory Retail Asset Class

          • PIB 4.12.16

            An Authorised FirmG must apply a 100% risk weight to any CR ExposureG in the regulatory retail asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Residential Mortgage Asset Class

          • PIB 4.12.17

            An Authorised FirmG must risk weight any CR ExposureG in the residential mortgage asset class in accordance with the following table:

            Risk weights for the residential mortgage asset class

            Condition Risk WeightG
            Loans fully secured on residential property to a maximum loan to value of 80% 50%
            Loans secured on residential property in excess of a loan to value of 80% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Commercial Real Estate Asset Class

          • PIB 4.12.18

            An Authorised FirmG must apply a 100% risk weight to any CR ExposureG in the commercial real estate asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.19

            An Authorised FirmG must apply a risk weight of 150% to ExposuresG , including ExposuresG in the form of SharesG or UnitsG in a Collective Investment FundG , that are associated with particularly high risks.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.20

            For the purposes of PIB Rule 4.12.19, ExposuresG with particularly high risks must include the following investments:

            (a) investments in venture capital funds
            (b) investments in hedge funds or alternative investment funds, including but not limited to private equity funds;
            (c) speculative immovable property financing; and
            (d) any investments declared by the DFSAG to constitute high risk for the purpose of this RuleG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.21

            When assessing whether an ExposureG other than ExposuresG referred to in PIB Rule 4.12.20 is associated with particularly high risks, an Authorised FirmG must take into account the following risk characteristics:

            (a) there is a high risk of loss as a result of a default of the obligor; and
            (b) it is impossible to assess adequately whether the ExposureG falls under (a).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Other Exposures Asset Class

          • PIB 4.12.22

            An Authorised FirmG must apply a 100% risk weight to any CR ExposureG in the other ExposuresG asset class.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.23

            InvestmentsG in equity or regulatory capital instruments issued by banks or securities firms must be risk weighted at 100%, unless deducted from the capital base.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Past Due Exposures

          • PIB 4.12.24

            Subject to Rules PIB 4.12.25 and PIB 4.12.26, an Authorised FirmG must risk-weight the unsecured portion of any CR ExposureG that is past due for more than 90 days in accordance with the following table.

            Risk weights for past due ExposuresG

            Condition Risk WeightG
            Where specific provisions are less than 20% of the outstanding amount of the ExposureG 150%
            Where specific provisions are no less than 20% of the outstanding amount of the ExposureG 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.25

            For the purposes of PIB Rule 4.12.24, an Authorised FirmG must calculate the unsecured portion of any CR ExposureG that is past due for more than 90 days as follows:

            (a) for an Authorised FirmG using the FCSA:
            Unsecured Portion = E – P – Cf
            where:
            (i) E = E calculated in accordance with PIB section 4.9;
            (ii) P = notional amount of eligible credit protection received; and
            (iii) Cf = fair value of eligible financial CollateralG received; or
            (b) for an Authorised FirmG using the FCCA:
            Unsecured Portion = E* – P
            where —
            (i) E* = E* calculated in accordance with PIB section 4.9; and
            (ii) P = notional amount of eligible credit protection received.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.12.26

            An Authorised FirmG must apply a 100% risk weight to any CR ExposureG in the residential mortgage asset class that is past due for more than 90 days.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.13 Credit Risk Mitigation

        • PIB 4.13 Guidance

          This section sets out the principles and methodologies for the recognition of Credit RiskG mitigation in the calculation of Credit RWAG .

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • General Requirements

          • PIB 4.13.1

            (1) An Authorised FirmG must not recognise the effects of Credit RiskG mitigation unless:
            (a) all documentation relating to that mitigation is binding on all relevant parties and legally enforceable in all relevant jurisdictions; and
            (b) the Authorised FirmG complies with the RulesG set out in this section, as applicable.
            (2) Where the calculation of Credit RWAG already takes into account the Credit RiskG mitigant, the provisions of this section do not apply.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.1 Guidance

              An Authorised FirmG should conduct sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability. The review should cover relevant jurisdictions such as the jurisdiction whose law governs the credit protection or CollateralG agreement and the jurisdiction whose law governs the transaction subject to the credit protection or CollateralG agreement. There should be sufficient written documentary evidence to adequately support the conclusion drawn and rebut any legal challenge. While an Authorised FirmG may use either in-house or external legal counsel, it should consider whether or not in-house counsel opinion is appropriate. The senior management of the Authorised FirmG should ensure that an officer of the Authorised FirmG who is legally qualified and independent of the parties originating the transaction reviews the legal opinion and confirms that he is satisfied that an adequate review has been completed and that he agrees with the conclusions drawn. A record of these reviews should be kept and made available at the request of the DFSAG .

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.2

            Where an Authorised FirmG uses multiple Credit RiskG mitigation for a single ExposureG , the Authorised FirmG must divide the ExposureG into portions covered by each mitigation and must calculate the Credit RiskG -weighted ExposureG amount of each portion separately. An Authorised FirmG must apply the same approach when recognising eligible credit protection by a single protection provider where the eligible credit protection has differing maturities.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.3

            (1) An Authorised FirmG must take all appropriate steps to ensure the effectiveness of the Credit RiskG mitigation arrangements it employs and to address related risks.
            (2) Where an Authorised FirmG reduces or transfers Credit RiskG by the use of Credit RiskG mitigation, an Authorised FirmG must employ appropriate and effective policies and procedures to identify and control other risks which arise as a consequence of the transfer.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.3 Guidance

              1. The use of techniques to reduce or transfer Credit RiskG may simultaneously increase other risks (residual risks) which include legal, operational, liquidity and Market RisksG . The DFSAG expects an Authorised FirmG to employ methods to identify and control these risks, including:
              a. strategy;
              b. consideration of the underlying credit;
              c. valuation;
              d. policies and procedures;
              e. systems;
              f. control of roll-off risks; and
              g. management of Concentration RiskG arising from the use of Credit RiskG mitigation and the interaction of such risk with the overall Credit RiskG profile of the Authorised FirmG .
              2. In order to fulfil the above, an Authorised FirmG should ensure a clearly articulated strategy for the use of Credit RiskG mitigation as an intrinsic part of the general credit strategy of an Authorised FirmG .
              3. Where an ExposureG is subject to Credit RiskG mitigation, credit managers should continue to assess the ExposureG on the basis of the obligor's creditworthiness. Credit managers should obtain and analyse sufficient financial information to determine the obligor's risk profile and its management and operational capabilities.
              4. CollateralG should be revalued frequently, and the unsecured ExposureG should also be monitored frequently. Frequent revaluation is prudent, and the revaluation of marketable securities should occur on at least a daily basis. Furthermore, measures of the potential unsecured ExposureG under collateralised transactions should be calculated under stressed and normal conditions. One such measure would take account of the time and cost involved if the obligor or CounterpartyG were to default and the CollateralG had to be liquidated. Furthermore, the setting of limits for collateralised CounterpartiesG should take account of the potential unsecured ExposureG . Stress tests and scenario analysis should be conducted to enable the Authorised FirmG to understand the behaviour of its portfolio of Credit RiskG mitigation arrangements under unusual market conditions. Any unusual or disproportionate risk identified should be managed and controlled.
              5. Clear policies and procedures should be established in respect of CollateralG management, including:
              a. the terms of CollateralG agreements;
              b. the types of CollateralG and enforcement of CollateralG terms (e.g. waivers of posting deadlines);
              c. the management of legal risks;
              d. the administration of agreement (e.g. detailed plans for determining default and liquidating CollateralG ); and
              e. the prompt resolution of disputes, such as valuation of CollateralG or positions, acceptability of CollateralG , fulfilment of legal obligations and the interpretation of contract terms.
              6. The policies and procedures referred to under GuidanceG note 1(d) should be supported by CollateralG management systems capable of tracking the location and status of posted CollateralG (including re-hypothecated CollateralG ), outstanding CollateralG calls and settlement problems.
              7. Where an Authorised FirmG obtains credit protection that differs in maturity from the underlying credit ExposureG , the Authorised FirmG should monitor and control its roll-off risks, i.e. the fact that the Authorised FirmG will be fully exposed when the protection expires, and the risk that it will be unable to purchase credit protection or ensure its capital adequacy when the credit protection expires.
              8. Taking as CollateralG large quantities of instruments issued by one obligor creates Concentration RiskG . An Authorised FirmG should have a clearly defined policy with respect to the amount of Concentration RiskG it is prepared to run. Such a policy might, for example, include a cap on the amount of CollateralG it would be prepared to take from a particular IssuerG or market. The Authorised FirmG should also take CollateralG and purchased credit protection into account when assessing the potential concentrations in its overall credit profile.
              9. Notwithstanding the presence of Credit RiskG mitigation considered for the purposes of calculating Credit RWAG amounts, an Authorised FirmG should continue to undertake a full Credit RiskG assessment of the underlying ExposureG .
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.4

            (1) An Authorised FirmG must be able to satisfy the DFSAG that it has systems in place to manage potential concentration of risk arising from its use of guarantees and Credit DerivativesG .
            (2) An Authorised FirmG must be able to demonstrate how its strategy in respect of its use of Credit RiskG mitigation techniques, and in particular use of Credit DerivativesG and guarantees interacts with its management of its overall risk profile.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Collateral

          • PIB 4.13.4 Guidance

            In order to recognise the effects of Credit RiskG mitigation of the types of CollateralG set out in Rules PIB 4.13.5 to PIB 4.13.7, an Authorised FirmG must ensure that the relevant requirements in PIB Rule 4.13.8 are complied with.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.5

            (1) For an Authorised FirmG using the FCSA, eligible financial CollateralG comprises:
            (a) cash (as well as certificates of deposit or other similar instruments issued by the Authorised FirmG ) on deposit with the Authorised FirmG ;
            (b) gold;
            (c) any debt security:
            (i) with an Original MaturityG of one year or less that has a short-term Credit Quality GradeG of 3 or better as set out in PIB section 4.12; or
            (ii) with an Original MaturityG of more than one year that has a Credit Quality GradeG of 4 or better as set out in PIB section 4.12 if it is issued by a central government or Central BankG , or a Credit Quality GradeG of 3 or better as set out in PIB section 4.12 if it is issued by any other entity;
            (d) any debt security issued by a bank that does not have an external credit assessment by a recognised ECAIG if it fulfils the following criteria:
            (i) any debt security which is listed on a regulated exchange;
            (ii) the debt security is classified as senior debt, not subordinated to any other debt obligations of its IssuerG ;
            (iii) all other rated debt securities issued by the same IssuerG which rank equally with the mentioned debt security have a long term or short term (as applicable) Credit Quality GradeG by a recognised ECAIG of "3" or better;
            (iv) the Authorised FirmG is not aware of information to suggest that the issue would justify a Credit Quality GradeG of below "3" as indicated in (iii) above; and
            (v) the Authorised FirmG can demonstrate to the DFSAG that the market liquidity of the debt security is sufficient to enable the Authorised FirmG to dispose the debt security at market price.
            (e) any equity security (including convertible bonds) that is included in a main index; or
            (f) any UnitG in a Collective Investment FundG where:
            (i) a price for the units is publicly quoted daily; and
            (ii) at least 90% of the deposited property of the FundG is invested in instruments listed in this RuleG .
            (2) Cash-funded credit-linked notesG issued by an Authorised FirmG against ExposuresG in the Non-Trading BookG which fulfil the criteria for eligible Credit DerivativesG must be treated as cash collateralised transactions.
            (3) Cash, mentioned in (1)(a), includes cash on deposit, certificates of deposit or other similar instruments issued by the Authorised FirmG that are held as CollateralG at a third-party bank in a non-custodial arrangement and that are pledged or assigned to the Authorised FirmG . This is subject to the pledge or assignment being unconditional and irrevocable. Under the FCSA, the risk weight to be applied to the ExposureG covered by such CollateralG must be the risk weight of the third-party bank.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.5 Guidance

              1. For the purposes of Rule PIB 4.13.5 and PIB 4.13.6, eligible financial CollateralG excludes any T1 Capital instrument or T2 Capital instrument issued by any entity in the Financial GroupG of the Authorised FirmG , which is held by the Authorised FirmG or any of its Financial GroupG entities as CollateralG .
              2. For an Authorised FirmG using UnitsG of a FundG under the FCSA approach, the use or potential use by that FundG of DerivativeG instruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the UnitsG in that FundG from being recognised as eligible financial CollateralG .
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.6

            For an Authorised FirmG using the FCCA, eligible financial CollateralG comprises:

            (a) any instrument listed in PIB Rule 4.13.5;
            (b) any equity SecurityG (including a convertible bond) that is traded on a regulated exchange;
            (c) any UnitG in a Collective Investment FundG which invests in equity securities referred to in (b), where:
            (i) a price for the UnitsG is publicly quoted daily; and
            (ii) at least 90% of the deposited property of the FundG is invested in instruments listed in this RuleG and PIB Rule 4.13.5.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.7

            In the case of any Counterparty RiskG ExposuresG in Rules PIB 4.13.5. and PIB 4.13.6 arising from an SFT which are included in the Trading BookG , eligible financial CollateralG includes all instruments which an Authorised FirmG may include in its Trading BookG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.7 Guidance

              For an Authorised FirmG using UnitsG of a FundG under the FCSA approach, the use or potential use by that FundG of DerivativeG instruments solely to hedge investments listed in PIB Rule 4.13.5 should not preclude the UnitsG in that FundG from being recognised as eligible financial CollateralG .

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Requirements for Recognition of Collateral

          • PIB 4.13.8

            An Authorised FirmG must ensure that the following requirements are complied with before it recognises the effects of Credit RiskG mitigation of any CollateralG :

            (a) the legal mechanism by which CollateralG is pledged, assigned or transferred must confer on the Authorised FirmG the right to liquidate or take legal possession of the CollateralG , in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the CounterpartyG (and, where applicable, of the custodian holding the CollateralG );
            (b) the Authorised FirmG has taken all steps necessary to fulfil those requirements under the law applicable to the Authorised Firm'sG interest in the CollateralG for obtaining and maintaining an enforceable security interest by registering it with a registrar or for exercising a right to net or set off in relation to title transfer CollateralG ;
            (c) the credit quality of the CounterpartyG and the value of the CollateralG do not have a material positive correlation;
            (d) securities issued by the CounterpartyG or any Closely RelatedG CounterpartyG are not eligible;
            (e) the Authorised FirmG has implemented procedures for the timely liquidation of CollateralG to ensure that any legal conditions required for declaring default of CounterpartyG and liquidating the CollateralG are observed, and that the CollateralG can be liquidated promptly; and
            (f) where the CollateralG is held by a custodian, the Authorised FirmG has taken reasonable steps to ensure that the custodian segregates the CollateralG from its own assets.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Guarantees

          • PIB 4.13.9

            (1) An Authorised FirmG may recognise the effects of Credit RiskG mitigation of a guarantee only if it is provided by any of the following entities:
            (a) central government or Central BankG ;
            (b) MDB referred to in PIB Rule 4.12.8
            (c) International Organisations referred to in PIB Rule 4.12.9;
            (d) PSE;
            (e) banks and securities firms which qualify for inclusion in bank asset class; or
            (f) any other entity that has a Credit Quality GradeG "3" or above.
            (2) An Authorised FirmG must not recognise the effects of Credit RiskG mitigation of a guarantee unless all of the following requirements are complied with:
            (a) the guarantee is an explicitly documented obligation assumed by the guarantor;
            (b) the guarantee represents a direct claim on the guarantor;
            (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 guarantee if applicable, there is an irrevocable obligation on the part of the guarantor to pay out a predetermined amount upon the occurrence of a credit event, as defined under the guarantee;
            (e) the guarantee does not contain any clause, the fulfilment of which is outside the direct control of the Authorised FirmG , that:
            (i) would allow the guarantor to cancel the guarantee unilaterally;
            (ii) would increase the effective cost of the guarantee as a result of deteriorating credit quality of the underlying ExposureG ;
            (iii) could prevent the guarantor 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 guarantee agreed ex-ante to be reduced ex-post by the guarantor;
            (f) the Authorised FirmG is able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction on the default of, or non-payment by, the underlying obligor without first having to take legal action to pursue the underlying obligor for payment; and
            (g) the guarantee covers all types of payments that the underlying obligor is expected to make under the documentation governing the transaction, except in the case of accrued interest, accrued expenses or fees outstanding, where these are deemed immaterial.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.9 Guidance

              1. PIB Rule 4.13.9(2)(e) does not include any guarantee with a cancellation clause where it is provided that any obligation incurred or transaction entered into prior to any cancellation, unilateral or otherwise, continues to be guaranteed by the guarantor.
              2. The guarantee payments may be in the form of the guarantor making a lump sum payment of all monies to the Authorised FirmG or the guarantor assuming the future payment obligations of the CounterpartyG covered by the guarantee, as specified in the relevant documentation governing the guarantee.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.10

            In addition to the requirements in PIB Rule 4.13.9, where an Authorised FirmG has an ExposureG that is protected by a guarantee or that is counter-guaranteed by a central government or Central BankG , a regional government or local authority or a PSE claims on which are treated as claims on the central government in whose jurisdiction they are established, a MDB or an international organisation to which a 0% risk weight is assigned under PIB section 4.12, an Authorised FirmG may treat the ExposureG as being protected by a direct guarantee from the central government or Central BankG in question, provided the following requirements are complied with:

            (a) the counter-guarantee covers all Credit RiskG elements of the ExposureG ;
            (b) both the original guarantee and the counter-guarantee comply with all the requirements for guarantees set out in this section, except that the counter-guarantee need not be direct and explicit with respect to the original ExposureG ; and
            (c) the Authorised FirmG is able to satisfy the DFSAG that the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Derivatives

          • PIB 4.13.11

            (1) An Authorised FirmG may recognise the effects of Credit RiskG mitigation of a Credit DerivativeG only if it is provided by any of the following entities:
            (a) central government or Central BankG ;
            (b) MDB referred to in Rules PIB 4.12.7 to PIB 4.12.9;
            (c) International Organisations referred to in PIB Rule 4.12.9;
            (d) PSE;
            (e) banks and securities firms which qualify for inclusion in bank asset class; or
            (f) any other entity that has a Credit Quality GradeG "3" or better.
            (2) An Authorised FirmG may recognise the effects of Credit RiskG mitigation of only the following types of Credit DerivativesG :
            (a) credit default swaps;
            (b) total return swaps;
            (c) credit linked notesG which are cash funded; and
            (d) instruments that are composed of, or are similar in economic substance, to one or more of the Credit DerivativesG in (a) to (c).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.12

            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]

            • PIB 4.13.12 Guidance

              1. An Authorised FirmG should not recognise the effects of Credit RiskG mitigation of a total return swap if it purchases credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the underlying asset that is protected (either through reductions in its marked-to-market value or by an addition to reserves).
              2. The DFSAG would generally consider the requirements in (f) to have been complied with even if the requirements are not specifically set out so long as the obligations of the credit protection provider under the Credit DerivativeG contract would include those requirements.
              3. The DFSAG would generally consider the cash settlement methodology provided in the ISDA Credit DerivativesG Definitions as satisfying the requirement for obtaining post-credit event valuations of the underlying obligation.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Currency Mismatches

          • PIB 4.13.13

            (1) In the case where there is a currency mismatch between the credit protection and the underlying ExposureG , an Authorised FirmG must reduce the amount of the ExposureG deemed to be protected by applying a haircut, as follows:
            Protected portion GA = G (1 - HFX)
            where:
            (a) G = notional amount of the credit protection; and
            (b) HFX = haircut appropriate for currency mismatch between the credit protection and underlying obligation ExposureG based on a ten-business day holding period, assuming daily mark-to-market.
            (2) An Authorised FirmG must determine HFX in the following manner:
            (a) if the Authorised FirmG uses standard supervisory haircuts, HFX is 8%; and
            (b) if the Authorised FirmG uses own-estimate haircuts, it must estimate HFX according to Rules PIB A4.3.6 to PIB A4.3.26 in PIB App4 based on a ten-business day holding period, assuming daily mark-to-market.
            (3) If the credit protection is not marked-to-market daily, HFX must be scaled in accordance with PIB Rule A4.3.25.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Maturity Mismatches

          • PIB 4.13.14

            An Authorised FirmG may recognise the effects of Credit RiskG mitigation for an ExposureG where there is a maturity mismatch only if the Credit RiskG mitigant has an Original MaturityG of at least one year and a residual maturity of more than three months. For the purposes of calculating Credit RWAG , a maturity mismatch occurs when the residual maturity of the Credit RiskG mitigant is less than that of the underlying ExposureG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.15

            (1) An Authorised FirmG must determine the maturity of the underlying ExposureG and the maturity of the Credit RiskG mitigant conservatively. The residual maturity of the underlying ExposureG must be gauged as the longest possible remaining time before the CounterpartyG is scheduled to fulfil its obligation, taking into account any applicable grace period.
            (2) In the case of Credit RiskG mitigant, embedded options which may reduce the term of the credit protection must be taken into account so that the shortest possible residual maturity is used. Where a call is at the discretion of the protection seller, the residual maturity will be at the first call date. If the call is at the discretion of the Authorised FirmG but the terms of the arrangement at origination of the Credit DerivativeG contain a positive incentive for the Authorised FirmG to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the residual maturity.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.16

            (1) An Authorised FirmG must calculate the value of the Credit RiskG mitigation adjusted for any maturity mismatch (referred to as "PA"), using the following formula:
            PA = P(t-0.25)/(T-0.25)
            where —
            (a) P = value of the credit protection (e.g. CollateralG amount, guarantee amount) adjusted for any haircuts;
            (b) t = min (T, residual maturity of the Credit RiskG mitigant) expressed in years; and
            (c) T = min (5, residual maturity of the ExposureG ) expressed in years.
            (2) For residual maturity of the ExposureG in the case of a basket of ExposuresG with different maturities, an Authorised FirmG must use the longest maturity of any of the ExposuresG as the maturity of all the ExposuresG being hedged.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.16 Guidance

              The positive incentive for an Authorised FirmG to call the transaction before contractual maturity as referred in PIB Rule 4.13.15 would be, for example, a situation wherein there is a step-up in cost in conjunction with a call feature or where the effective cost of cover remains the same even if credit quality remains the same or increases.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • On-balance Sheet Netting

          • PIB 4.13.17

            (1) An Authorised FirmG may recognise as eligible the NettingG of an on-balance sheet ExposureG against an offsetting on-balance sheet item if the related NettingG agreement meets the condition in PIB Rule 4.13.19.
            (2) Eligibility for NettingG is limited to reciprocal cash balances between the Authorised FirmG and its CounterpartyG . Only loans and deposits of the Authorised FirmG may be subject to a modification of their Credit RWAsG as a result of an on-balance sheet NettingG agreement.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.18

            (1) Assets (loans) and liabilities (deposits) subject to recognised on-balance sheet NettingG are to be treated as cash CollateralG using the formula in PIB A4.3.6, under which an Authorised FirmG may use zero haircuts for ExposureG and CollateralG .
            (2) When a currency mismatch exists, an Authorised FirmG must apply the standard supervisory haircut of 8% for currency mismatch.
            (3) When a maturity mismatch exists between the off-setting items, an Authorised FirmG must apply the Rules PIB 4.13.14 to PIB 4.13.16 to address the maturity mismatch.
            (4) NetG credit ExposureG , after taking into account recognised NettingG , will be subject to the applicable CRW for the CounterpartyG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.13.19

            For an Authorised FirmG to recognise an on-balance sheet NettingG agreement for the purposes of PIB Rule 4.13.17, all of the following conditions must be satisfied:

            (1)
            (a) both the on-balance sheet ExposureG (asset) and the offsetting on-balance sheet item (liability) are owing between the Authorised FirmG and the same CounterpartyG ;
            (b) the Authorised FirmG nets the on-balance sheet ExposureG (asset) and the offsetting on-balance sheet item (liability) in a way that is consistent with its legal rights against the CounterpartyG ;
            (c) a legal right of set-off exists;
            (d) the agreement between the Authorised FirmG and the CounterpartyG does not contain a Walkaway ClauseG ;
            (e) the NettingG provided for in the agreement between the Authorised FirmG and the CounterpartyG is effective and enforceable in the event of default, bankruptcy, liquidation or other similar circumstances affecting either the CounterpartyG or the Authorised FirmG ;
            (f) the on-balance sheet ExposureG (asset) and the offsetting on-balance sheet item (liability) are monitored, controlled and managed on a net basis; and
            (g) the potential for roll-off ExposureG is monitored and controlled where there is a maturity mismatch; and
            (2) it has, in respect of each relevant jurisdiction, a written and reasoned legal opinion which:
            (a) has been provided by an external source of legal advice of appropriate professional standing;
            (b) confirms that the requirements of (1)(a)-(e) are met for all relevant jurisdictions; and
            (c) is kept under review to ensure that it remains correct and up to date in the event of changes to the relevant laws.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.13.19 Guidance

              1. An Authorised FirmG should assess whether any qualifications, assumptions or reservations contained in the legal opinion cast doubt upon the enforceability of the NettingG agreement. If, as a result of the qualifications, assumptions or reservations, there is material doubt about the enforceability of the agreement, the Authorised FirmG should assume that the requirements for NettingG have not been met.
              2. An Authorised FirmG using a standard form NettingG agreement and a supporting legal opinion should ensure that the relevant requirements in Rules PIB 4.13.17 to PIB 4.13.19 are met. A standard form NettingG agreement is a form of agreement which is prepared by a reputable, internationally recognised industry association and is supported by its own legal opinion. Where additional clauses are added to a standard form NettingG agreement, the Authorised FirmG should satisfy itself that the amended NettingG agreement continues to meet the legal and contractual requirements in Rules PIB 4.13.17 to PIB 4.13.19. For instance, in such cases, an Authorised FirmG may wish to obtain a second legal opinion to confirm that the relevant requirements in Rules PIB 4.13.17 to PIB 4.13.19 are still satisfied.
              3. PIB App4 sets out the calculation of the PFCE arising from OTC derivative contracts, on a net basis.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.14 Securitisation

        • Application

          • PIB 4.14.1

            This section applies to an Authorised FirmG which:

            (a) acts as an OriginatorG in a securitisation;
            (b) transfers Credit RiskG on a single item or on a pool of items by any of the legal transfer methods set out in PIB Rule A4.10.1;
            (c) acts as a SponsorG in a securitisation; or
            (d) provides Credit EnhancementG , liquidity support, or UnderwritingG or dealing facilities relating to the items being transferred.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Interpretation

          • PIB 4.14.2

            For the purposes of this chapter and PIB App4, "securitisation" includes Traditional SecuritisationG , Synthetic SecuritisationG and Re-securitisationG , as defined below:

            (a) A Traditional SecuritisationG is a structure where the cash flow from an underlying pool of ExposuresG is used to service at least two different stratified risk positions or tranches reflecting different degrees of Credit RiskG . Payments to the investors depend upon the performance of the specified underlying ExposuresG , as opposed to being derived from an obligation of the entity originating those ExposuresG . A Traditional SecuritisationG will generally assume the movement of assets off balance sheet.
            (b) A Synthetic SecuritisationG is a structure with at least two different stratified risk positions or tranches that reflect different degrees of Credit RiskG where Credit RiskG of an underlying pool of ExposuresG is transferred, in whole or in part, through the use of funded (e.g. credit-linked notesG ) or unfunded (e.g. credit default swaps) Credit DerivativesG or guarantees that serve to hedge the Credit RiskG of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool. A Synthetic SecuritisationG may or may not involve the removal of assets off balance sheet.
            (c) A Re-securitisationG ExposureG is a securitisation ExposureG in which the associated underlying pool of ExposuresG is tranched and at least one of the underlying ExposuresG is a securitisation ExposureG . In addition, an ExposureG to one or more Re-securitisationG ExposuresG is a Re-securitisationG ExposureG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.3 Guidance

              The DFSAG would treat other techniques to achieve the financing or re-financing of assets which are legally transferred to a scheme, by packaging them into a tradable form through the issue of SecuritiesG which are secured on the assets and serviced from the cashflows which they yield as "securitisation".

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Systems and Controls for the Use of Securitisations

          • PIB 4.14.3

            An Authorised FirmG must implement and maintain appropriate risk management systems to identify, manage, monitor and, where applicable, control all risks in relation to a securitisation transaction whether the firm is an investor, OriginatorG or SponsorG . In particular, such risk management systems should effectively address the following risks:

            (a) the liquidity and capital implications that may arise from the items returning to the balance sheet;
            (b) the Operational RisksG that may arise under a securitisation; and
            (c) reputational risks that may arise as a result of its securitisation activities.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.4

            An Authorised FirmG must have appropriate policies and procedures to ensure that the economic substance of the transaction is fully reflected in the process of managing the risks arising from such transactions. An Authorised FirmG must have appropriate policies and procedures in place to document its systems and controls in relation to securitisation risks. These policies should include details on the capital effects of the securitisation as set out in this chapter.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.5

            An Authorised FirmG must conduct periodic stress tests in relation to its securitisation activities and off balance sheet ExposuresG , including testing of future ability to transact securitisation as a means of Credit RiskG mitigation or for liquidity purposes.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.5 Guidance

              1. The periodic stress testing in relation to securitisation activities referred to in PIB Rule 4.14.5 should consider the firm-wide impact of those activities and ExposuresG in stressed market conditions and the implications for other sources of risk. Such stress tests should include both existing securitisation ExposuresG and transactions in the pipeline, as there is a risk of the pipeline transactions not being completed in a stressed market scenario.
              2. The frequency and extent of stress testing to fulfil the requirements of PIB Rule 4.14.5 should be determined on the basis of the materiality of the Authorised Firm'sG securitisation volumes and its off-balance sheet ExposuresG .
              3. An Authorised FirmG should have procedures in place to assess and respond to the results produced from the stress testing and these should be taken into account under the ICAAPG .
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.6

            In order to qualify for using the RulesG specified in this section, and particularly the risk weighting approach outlined below, an Authorised FirmG must demonstrate the following:

            (a) a comprehensive understanding of the risk characteristics of its individual securitisation ExposuresG , whether on balance sheet or off balance sheet, as well as the risk characteristics of the pools underlying securitisation ExposuresG ;
            (b) ability to access the performance information on the underlying pools on an on-going basis in a timely manner; and
            (c) a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the Authorised Firm'sG ExposureG to the transaction, such as waterfall triggers, Credit EnhancementsG , liquidity enhancements, market value triggers and deal specific definitions of default.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.6 Guidance

              1. An Authorised FirmG which is an investor, OriginatorG or SponsorG of a SecuritisationG should fully understand the risks it has assumed in order to ensure that it can accurately determine the Capital RequirementsG for the ExposuresG arising from the securitisation in accordance with the RulesG in this section.
              2. For the purposes of PIB Rule 4.14.6(b) information should include the percentage of loans 30,60, 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score etc. For Re-securitisationsG , Authorised FirmsG should have information relating to not only the underlying securitisation transactions but also the characteristics and performance of the underlying pools of such transactions.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.7

            Where an Authorised FirmG is either an OriginatorG or a SponsorG of a Traditional SecuritisationG or a Synthetic SecuritisationG :

            (a) the Authorised FirmG intending to conduct the securitisation must notify the DFSAG at least 30 days in advance of the proposed execution of the securitisation;
            (b) the Authorised FirmG conducting the securitisation must calculate its Credit RWAsG for all resultant ExposuresG from that securitisation, in accordance with PIB section 4.8, provided the requirements of this section are met; and
            (c) the Authorised FirmG conducting the securitisation must produce documentation reflecting the execution and economic substance of the transaction.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.7 Guidance

              The notification made to the DFSAG under (a) should include, inter alia, amounts of assets subject to securitisation, amounts retained, details of securitisation including legal structure, rating, tranches, details of legal transfer and any Credit RiskG mitigation applied and implications on the capital and liquidity position on the Authorised FirmG .

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of Credit RWA Arising from Securitisations

          • PIB 4.14.8

            An Authorised FirmG must calculate the Credit RWAG amounts for ExposuresG arising from securitisations according to the requirements in this section.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.8 Guidance

              1. An Authorised FirmG should apply the securitisation framework set out in this section for determining the regulatory Capital RequirementsG on ExposuresG arising from traditional and Synthetic SecuritisationsG or similar structures that contain features common to both.
              2. This section sets out the requirements for OriginatorsG , Authorised FirmsG which transfer Credit RiskG from their balance sheets and SponsorsG in a securitisation transaction involving Non-Trading BookG ExposuresG . This section also sets out the methodologies for calculation of RWAG amounts for securitisation ExposuresG . The RulesG setting out the methodologies for calculation of Market Risk Capital RequirementG amounts for securitisation ExposuresG held in the Trading BookG are specified in PIB chapter 5 and PIB App5 of this module.
              3. As securitisations may be structured in many different ways, an Authorised FirmG engaging in the activities relating to securitisations (whether traditional or SyntheticG ) must ensure that the economic substance of the transaction is fully considered, and reflected, in determining the capital treatment of a securitisation, rather than relying on the legal form of the SecuritisationG .
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.9

            An Authorised FirmG is required, subject to PIB Rule 4.14.12, to include all securitisation ExposuresG in its calculation of Credit RWAsG relating to securitisations, including the following:

            (a) those arising from the provision of Credit RiskG mitigants to a securitisation;
            (b) investments in asset backed SecuritiesG ;
            (c) retention of a subordinated tranche;
            (d) extension of a liquidity facility; and
            (e) extension of Credit EnhancementG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.10

            An Authorised FirmG must include in its calculation of Credit RWAG all of its securitisation ExposuresG held in the Non-Trading BookG , except for those securitisation ExposuresG which the Authorised FirmG is required to include as deductions from T1 Capital and deductions from T2 Capital.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.11

            Repurchased securitisation transactions must be treated as retained securitisation ExposuresG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Deductions

          • PIB 4.14.12

            (1) An Authorised FirmG may deduct SE ExposuresG which it has chosen not to treat in accordance with Rules PIB 4.14.8 to PIB 4.14.11 from Capital ResourcesG — 100% from CET1.
            (2) Credit-Enhancing Interest-Only StripsG (net of the deductions from CET1 Capital required at PIB Rule 4.14.13) are deducted 100% from CET1 Capital.
            (3) Deductions from capital may be calculated net of specific provisions taken against relevant securitisation ExposuresG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.13

            An Authorised FirmG must include as deductions from CET1 Capital any increase in issued capital or reserves resulting from a securitisation, such as that associated with expected future margin income resulting in a gain-on-sale that is recognised as issued capital or reserves.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.13 Guidance

              Gain-on-sale arises when there has been an increase in equity of the Authorised FirmG associated with recognising the discounted value of the expected future margin income as part of the regulatory capital.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.14

            An Authorised FirmG must assign a securitisation ExposureG to a Credit Quality GradeG based on the external credit assessment (where available) that is applicable to the securitisation ExposureG in accordance with relevant RulesG in this chapter.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Implicit Support

          • PIB 4.14.15

            An OriginatorG or a SponsorG of a securitisation must not provide Implicit Support to a securitisation transaction with a view to reducing potential or actual losses to investors outside of its contractual obligations;

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.16

            If an OriginatorG fails to comply with PIB Rule 4.14.15 in respect of a securitisation, it:

            (a) must include all the underlying ExposuresG of the securitisation in its calculation of Credit RWAsG as if those ExposuresG had not been Securitised and were on the balance sheet of the Authorised FirmG ;
            (b) must not recognise any gain-on-sale of assets to the securitisation; and,
            (c) must disclose to investors that the Authorised FirmG has provided non contractual support and the regulatory capital impact of doing so.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Requirements in Order for a Traditional Securitisation to be Excluded from the Calculation of RWA

          • PIB 4.14.17

            (1) An Authorised FirmG which is an OriginatorG or a SponsorG of a Traditional SecuritisationG may exclude Securitised ExposuresG from the calculation of Credit RWAG amounts only if all of the conditions detailed in PIB Rule A4.10.1 have been complied with.
            (2) An Authorised FirmG meeting the requirements specified in PIB Rule A4.10.1 must hold regulatory capital against any securitisation ExposuresG it retains.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Requirements in Order for a Synthetic Securitisation to be Excluded from the Calculation of RWA

          • PIB 4.14.18

            (1) An Authorised FirmG which is an OriginatorG or a SponsorG of a Synthetic SecuritisationG may recognise the effects of Credit RiskG mitigation of the Synthetic SecuritisationG in calculating its SE ExposureG RWAsG , only if:
            (a) all of the conditions detailed in PIB Rule A4.10.2 have been complied with;
            (b) the effects of Credit RiskG mitigation are obtained through eligible credit protection, eligible financial CollateralG or both; and
            (c) Credit RiskG is transferred to third parties.
            (2) In relation to (b), the Credit RiskG mitigation techniques used must meet the requirements of PIB section 4.13.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.18 Guidance

              In relation to (1)(c) the transferor is deemed to have effective control over the transferred Credit RiskG ExposuresG if it has the ability to repurchase the assets, or is obliged to retain the risk of the transferred assets. This does not include the retention of servicing rights.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.19

            (1) An Authorised FirmG meeting the conditions in PIB Rule 4.14.18 must still hold regulatory capital against any securitisation ExposuresG it retains.
            (2) The Authorised FirmG may recognise the effects of Credit RiskG mitigation of eligible financial CollateralG pledged by any SPE, but it may not recognise any SPE which is an IssuerG of securitisation ExposuresG as an eligible protection provider.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Operational Requirements for Use of External Credit Assessments

          • PIB 4.14.20

            The external credit assessment used for determining the applicable risk weight for a CR ExposureG must be determined by taking into account the entire amount of Credit RiskG (principal and interest) an Authorised FirmG is exposed to.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.21

            Credit assessments can only be considered from an ECAIG , and must meet the following criteria:

            (a) any credit assessments used for the purposes of risk weighting must be publicly available;
            (b) the external credit rating agencies must have expertise and market acceptance in rating securitisations of the nature being used for risk weighting purposes;
            (c) Authorised FirmsG must apply external credit rating agency ratings consistently to all tranches of securitisations;
            (d) where an ExposureG has two ratings from external credit rating agencies the less favourable rating must be used; and
            (e) where an ExposureG has more than two assessments by external credit rating agencies the two most favourable ratings can be selected, the review of these assessments is then determined in line with (d).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.22

            Where any Credit RiskG mitigation has been considered as part of any rating applied to a tranche of a securitisation, the risk weighting should be used and no additional capital recognition is permitted.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.23

            An Authorised FirmG must treat any securitisation ExposureG as an unrated ExposureG where:

            (a) the external credit assessment incorporates the credit protection provided directly to the SPE by a protection provider which is not an eligible protection provider;
            (b) the external credit assessment is at least partly based on unfunded support provided by the Authorised FirmG itself (e.g. if an Authorised FirmG buys ABCPG ) where it provides an unfunded securitisation ExposureG extended to the ABCP ProgrammeG , such as a liquidity facility or Credit EnhancementG , and that ExposureG plays a role in determining the credit assessment on the ABCPG , the Authorised FirmG must treat the ABCPG as if it were not rated and continue to hold capital against the other securitisation ExposuresG it provides);
            (c) the Credit RiskG mitigant is not obtained by the SPE but is separately obtained and applied to a specific securitisation ExposureG (e.g. a particular tranche); or
            (d) the Credit RiskG mitigation does not meet the eligibility criteria for mitigation specified in PIB section 4.13.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.24

            Where Credit RiskG mitigation is applied to a specific ExposureG within a securitisation the Authorised FirmG must treat the ExposureG as unrated, and then use the mitigation as set out in PIB section 4.13 should the RulesG contained in that section apply.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.25

            An Authorised FirmG must not use an external credit rating agency rating for risk weighting purposes where the assessment is at least partly based on unfunded support provided by the Authorised FirmG itself.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.26

            The treatment outlined in PIB Rule 4.14.24 also applies to ExposuresG in the Authorised Firm'sG Trading BookG . An Authorised Firm'sG Capital RequirementG for such ExposuresG held in the Trading BookG can be no less than the amount required under the Non-Trading BookG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of RWA Amounts for Securitisation Exposures

          • PIB 4.14.27

            (1) In order to calculate the RWAG amount for a securitisation position, the relevant risk weight must be assigned to the ExposureG value of the position in accordance with this section, based on the credit quality of the position.
            (2) For the purposes of this RuleG , the credit quality of a position must be determined by reference to the applicable credit quality assessment from a recognised external credit rating agency.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.28

            In cases where there are ExposuresG to different tranches in a securitisation, the ExposureG to each tranche must be considered a separate securitisation position.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.29

            The ExposureG value of an off-balance sheet securitisation position must, subject to PIB A4.2.2, be its nominal value multiplied by a CCF of 100%, wherever applicable.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.30

            The ExposureG value of a securitisation position arising from a financial derivative must be determined in accordance with Rules PIB 4.6.14 to PIB 4.6.21 dealing with treatment of financial derivatives.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Assigning Risk Weights

          • PIB 4.14.31

            An Authorised FirmG must assign a risk weight for any SE ExposureG in accordance with the tables below, to calculate the Credit RWAG amounts for that ExposureG .

            Risk WeightsG for Long-Term securitisation ExposuresG

            Long Term rating category
            Credit Quality GradeG 1 2 3 4 5 and above including unrated
            Risk WeightG to be applied to securitisation ExposuresG (excluding Re-securitisationG ExposuresG ) 20% 50% 100% 350% 1000% or Deduction from Capital ResourcesG
            Risk weight applied to Re-securitisationG ExposuresG 40% 100% 225% 650% 1000% or Deduction from Capital ResourcesG

            Risk WeightsG for Short-Term securitisation ExposuresG

            Short-term rating category
            Credit Quality GradeG I II III IV and above including unrated
            Risk WeightG to be applied 20% 50% 100% 1000% or Deduction from Capital ResourcesG
            Risk WeightG applied to Re-securitisationG ExposuresG 40% 100% 225% 1000% or deduction from Capital ResourcesG
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.32

            (1) In respect of securitisation positions which are assigned a 1000% risk weighting pursuant to the tables in PIB Rule 4.14.31, an Authorised FirmG may as an alternative to including the position in its calculation of Credit RWAG amounts, deduct from its CET1 Capital the ExposureG value of such positions.
            (2) For the purposes of this RuleG , the calculation of the ExposureG value may reflect eligible funded credit protection consistent with applicable RulesG in this chapter.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.33

            For an Authorised FirmG that is an OriginatorG or SponsorG of a securitisation, the Credit RWAG amounts calculated for its securitisation positions may be limited to the RWAG amounts which would be calculated for the SE ExposuresG had they not been Securitised subject to the presumed application of a 150% risk weight to all past due items and items belonging to regulatory high risk categories.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.34

            [Not currently in use]

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.35

            [Not currently in use]

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exceptions to Deduction of Unrated Securitisation Exposures

          • PIB 4.14.36

            In accordance with the tables under PIB Rule 4.14.31, all unrated securitisation positions must be deducted or risk weighted at 1000% with the following exceptions:

            (a) most senior ExposureG in a securitisation;
            (b) ExposuresG that are in a second loss position or better of an ABCPG and meet the requirements of PIB Rule 4.14.41; and
            (c) eligible liquidity positions.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Most Senior Exposure in a Securitisation

          • PIB 4.14.37

            (1) Where an Authorised FirmG holds or guarantees unrated securitisation ExposureG from the most senior tranche in a securitisation, the Authorised FirmG may apply the "look through" treatment, provided the composition of the underlying pool of ExposuresG securitised is known at all times and the Authorised FirmG is able to determine the applicable risk weights for the underlying ExposuresG .
            (2) An Authorised FirmG applying the look-through treatment to an unrated securitisation ExposureG , pursuant to (1), must apply to that securitisation ExposureG the weighted average of the risk weights of the underlying ExposuresG determined in accordance with the RulesG in this chapter, multiplied by a concentration factor.
            (3) For the purposes of (2), the concentration factor is calculated as the sum of the nominal amounts of all the tranches in that securitisation divided by the sum of the nominal amounts of the tranches junior to, or pari-passu with, the tranche in which the position is held, including that tranche itself. The resulting weighted average risk weight must not be higher than 1000% or lower than the risk weight applicable to a more senior tranche which is rated.
            (4) Where the Authorised FirmG is unable to determine the risk weights for the underlying ExposuresG in accordance with this RuleG , the unrated securitisation position will not be eligible for the relief and must be deducted from CET 1 Capital of the Authorised FirmG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.38

            An Authorised FirmG wishing to apply the treatment referred to in PIB Rule 4.14.37 must notify the DFSAG , in writing, at least 30 days in advance, of the intention to adopt this treatment. The notification should include the treatments being adopted and the weightings applied under the provision.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.39

            The resulting weighted average risk weight must not be higher than 1000% or lower than the risk weight applicable to a more senior tranche which is rated.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.40

            An Authorised FirmG must have systems and controls in place to monitor effectively the composition of ExposuresG where the look-through provision has been applied on an ongoing basis.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exposures that are in a Second Loss Position or Better of an ABCP

          • PIB 4.14.41

            An Authorised FirmG may apply a risk weight of 100% or the highest risk weight assigned to any of the underlying ExposuresG in the ABCP ProgrammeG , whichever is higher, to an unrated securitisation ExposureG arising from the ABCP ProgrammeG , provided the securitisation position complies with the following conditions:

            (a) the subject securitisation ExposureG must be in a tranche which is economically in a second loss position or better and the First Loss PositionG must provide meaningful credit protection to the second loss tranche;
            (b) the associated Credit RiskG of the securitisation ExposureG is the equivalent of a Credit Quality GradeG of III or better in the short-term rating category; and
            (c) the Authorised FirmG must not hold a position in the First Loss PositionG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Eligible Liquidity Positions

          • PIB 4.14.42

            An Authorised FirmG providing an unrated eligible liquidity facility may assign to the resulting securitisation ExposureG the highest risk weight that would be applied to any of the underlying ExposuresG covered by the facility.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.43

            (1) An off balance sheet SE ExposureG will receive a 100% CCF unless:
            (a) the ExposureG qualifies as an eligible liquidity facility, or
            (b) the ExposureG is an eligible ServicerG cash advance facility.
            (2) In relation to (1), an eligible ServicerG cash advance facility is a facility provided to a securitisation in order to ensure uninterrupted flow of payments to investors. As long as the ServicerG is entitled to full reimbursement and this right is senior to all other claims on cash flows from the underlying pool of ExposuresG , and where these facilities meet the requirements of PIB 4.14.44 and are unconditionally cancellable at any time, any undrawn commitments can then have a 0% CCF applied.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.44

            (1) For the purposes of PIB Rule 4.14.42, an Authorised FirmG may treat an ExposureG as an eligible liquidity facility provided the following requirements are met:
            (a) the liquidity facility documentation must clearly identify and limit the circumstances under which it may be drawn;
            (b) draws must be limited to the amount that is likely to be repaid from the liquidation of the underlying ExposuresG and any seller provided Credit EnhancementsG ;
            (c) the facility must not provide credit support by covering for any losses incurred in the underlying pool of ExposuresG prior to drawdown;
            (d) the facility must not be structured to provide regular or permanent funding;
            (e) the facility must be subject to an asset quality test to preclude it being used to cover Credit RiskG ExposuresG that are in default;
            (f) where the facility is used to fund externally rated SecuritiesG the facility can only be used to fund SecuritiesG that are externally rated Investment GradeG at the time of funding;
            (g) the facility cannot be drawn after all Credit EnhancementsG from which the liquidity facility would benefit have been exhausted; and
            (h) repayment of draws of the facility cannot be subordinated to any interests of any note holder in the programme or be subject to deferral or waiver.
            (2) Where the ExposureG meets the requirements as set out in (1), the following CCF will apply:
            (a) 50% to the eligible liquidity facility regardless of maturity; and
            (b) 100% if an external rating of the liquidity facility is used for the risk weighting.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.45

            (1) An Authorised FirmG which provides credit protection for a basket of reference ExposuresG through an unrated first-to-default Credit DerivativeG may apply to the securitisation ExposureG the aggregate of the risk weights that would be assigned to the reference ExposuresG , provided that the resulting Capital RequirementG does not exceed the notional amount of the credit protection.
            (2) An Authorised FirmG which provides credit protection for a basket of reference ExposuresG through an unrated second-to-default Credit DerivativeG may apply the treatment referred to in (1), except that in aggregating the risk weights, the reference ExposureG with the lowest risk-weighted amount may be excluded.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Overlapping Exposures

          • PIB 4.14.46

            (1) Where an Authorised FirmG has two or more overlapping ExposuresG to a securitisation, the firm must, to the extent that the positions overlap, include in its calculation of Credit RWAG amounts only the ExposureG , or portion of the ExposureG , producing the higher Credit RWAG amounts.
            (2) For the purposes of (1), overlapping ExposuresG result where an Authorised FirmG provides two or more facilities (whether they are liquidity facilities or Credit EnhancementsG ) in relation to a securitisation that can be drawn under various conditions with different triggers, with the result that the Authorised FirmG provides duplicate coverage to the underlying ExposuresG . The facilities provided by the Authorised FirmG may overlap since a draw on one facility may preclude (in part) a draw on the other facility.
            (3) Where the overlapping ExposuresG are subject to different conversion factors the Authorised FirmG must apply the higher of the conversion factors to the ExposureG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.46 Guidance

              The firm may also recognise such an overlap between capital charges for Specific RiskG in relation to positions in the trading book and capital charges for positions in the Non-Trading BookG , provided that the firm is able to calculate and compare the capital charges for the relevant positions.

              However, if overlapping facilities are provided by different Authorised FirmsG , each Authorised FirmG must calculate Capital RequirementG for the maximum amount of its ExposureG .

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Credit Risk Mitigation

          • PIB 4.14.47

            Where an Authorised FirmG obtains credit protection on a securitisation ExposureG , the calculation of Credit RWAG amounts must be in accordance with the RulesG in Credit RiskG mitigation in PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.48

            Where an Authorised FirmG provides credit protection to a securitisation ExposureG it must calculate a Capital RequirementG as if it were an investor in the securitisation in line with PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.49

            An Authorised FirmG must not recognise any SPE which is an IssuerG of securitisation ExposuresG , as an eligible credit protection provider. Guarantees provided must meet the requirements of PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.50

            For the purpose of setting regulatory capital against a maturity mismatch, the Capital RequirementG must be determined in accordance with PIB section 4.13. When ExposuresG being hedged have different maturities, the longest maturity must be used. Maturity of credit protection must be calculated in accordance with PIB section 4.13.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Capital Requirements for Securitisations with Early Amortisation Provisions

          • PIB 4.14.51

            An Authorised FirmG which is the OriginatorG or SponsorG of a securitisation involving revolving ExposuresG as well as an Early AmortisationG provision, must calculate an additional RWAG amount in accordance with PIB Rule 4.14.57 to address the possibility that its Credit RiskG ExposureG levels may increase following the operation of the Early AmortisationG provision.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.51 Guidance

              1. This section sets out the methodology for calculation of the Credit RWAG amount by an OriginatorG , when it sells revolving ExposuresG into a securitisation that contains an Early AmortisationG provision.
              2. Early AmortisationG of the SecuritiesG describes the process whereby the repayment of the investors' interest is brought forward upon the occurrence of specified events. Events that are economic in nature by reference to the financial performance of the transferred assets are known as economic triggers.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.52

            (1) An Authorised FirmG which is the OriginatorG or SponsorG of a securitisation involving revolving ExposuresG , must calculate Credit RWAG amounts in respect of the total ExposureG related to a securitisation (both drawn and undrawn balances) when:
            (a) the Authorised FirmG sells ExposuresG into a structure that contains an Early AmortisationG feature; and
            (b) the ExposuresG are of a revolving nature.
            (2) Where the underlying pool of a securitisation comprises revolving and term ExposuresG , an Authorised FirmG must apply the amortisation treatment outlined below for determining applicable regulatory capital only to that portion of the underlying pool containing revolving ExposuresG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.53

            An Authorised FirmG which is the OriginatorG of a Revolving SecuritisationG that includes economic triggers for Early AmortisationG may regard the ExposuresG as transferred for the period up to the point of repayment, provided that:

            (a) during the amortisation period there is full sharing of interest, principal, expenses, losses and recoveries; and
            (b) the Authorised Firm'sG risk management system provides warning indicators when economic or non-economic triggers may be activated.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.53 Guidance

              Examples of such triggers include tax events, legal changes resulting in an Authorised Firm'sG non-performance in its role as a servicing agent, and triggers relating to the insolvency of the OriginatorG .

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.54

            An Authorised FirmG is not required to calculate a Capital RequirementG for Early AmortisationG in the following situations:

            (a) replenishment structures where the underlying ExposuresG do not revolve and the Early AmortisationG ends the ability of the Authorised FirmG to add new ExposuresG ;
            (b) where the risk associated with revolving assets containing amortisation features that mimic term structures, where the risk does not return to the Authorised FirmG ;
            (c) structures where the Authorised FirmG securitises one or more credit lines and where investors remain fully exposed to future draws by borrowers so that the risk on the underlying facilities does not return to the OriginatorG even after an Early AmortisationG event has occurred; or
            (d) where the Early AmortisationG clause is solely triggered by events not related to the performance of the Securitised assets or the Authorised FirmG , such as material changes in tax laws or regulations.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.55

            For an Authorised FirmG subject to the Capital RequirementG referred to in PIB Rule 4.14.51, the maximum Credit RWAG calculated under that RuleG must not exceed the greater of the following:

            (a) the RWAG amounts calculated in respect of its positions in the investors' interest; or
            (b) the RWAG amounts that would be calculated in respect of the Securitised ExposuresG , if those had not been securitised.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.56

            An Authorised FirmG must deduct from its CET1 Capital any gain-on-sale and Credit-Enhancing Interest-Only StripsG arising from any securitisation subject to the provisions of the RulesG above.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Calculation of Credit RWA Amounts for Securitisation Positions Subject to Early Amortisation Clause

          • PIB 4.14.57

            In regard to securitisation positions subject to an Early AmortisationG clause, the Credit RWAG amounts for an Authorised FirmG acting as the OriginatorG are calculated as the product of the following:

            (a) the investors' interest
            (b) the appropriate CCF (in accordance with the table in PIB Rule 4.14.61); and
            (c) the appropriate risk weight for the underlying ExposureG type.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.57 Guidance

              In relation to PIB Rule 4.14.57(c), the Authorised FirmG should also consider whether a line, or facility, is committed or uncommitted. A line is considered to be uncommitted if it is unconditionally cancellable without prior notice by the Authorised FirmG . They also differ according to whether the Securitised ExposuresG are committed retail credit lines or credit lines (such as revolving credit facilities).

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.58

            (1) An Early AmortisationG provision that does not satisfy the conditions for a Controlled Early AmortisationG provision will be treated as a non-Controlled Early AmortisationG provision.
            (2) For the purpose of (1), the conditions for a Controlled Early AmortisationG provision are as follows:
            (a) the Authorised FirmG must have an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an Early AmortisationG ;
            (b) throughout the duration of the transaction, including the amortisation period, there is the same pro rata sharing of interest, principal, expenses, losses and recoveries based on the firm's and investors' relative shares of the receivables outstanding at the beginning of each month;
            (c) the firm must set a period for amortisation that would be sufficient for at least 90% of the total debt outstanding at the beginning of the Early AmortisationG period to have been repaid or recognised as in default; and
            (d) the pace of repayment should not be any more rapid than would be allowed by straight-line amortisation over the period set out in (c).
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.59

            For uncommitted retail credit lines in securitisations containing Controlled Early AmortisationG which is triggered by the Excess SpreadG level falling to a specified level, an Authorised FirmG must compare the three month average Excess SpreadG level with the Excess SpreadG levels at which the Excess SpreadG is required to be trapped.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.60

            Where the securitisation does not require Excess SpreadG to be trapped, the trapping point is deemed to be 4.5 percentage points greater than the Excess SpreadG level at which Early AmortisationG is triggered.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.61

            An Authorised FirmG must divide the Excess SpreadG level by the transaction's Excess SpreadG trapping point to determine the appropriate segments and apply corresponding conversion factors as set out in the following table:

            Controlled Early AmortisationG features
              Uncommitted Committed
            Retail Credit Lines 3 Month average Excess SpreadG CCF 90%
            133.33% of trapping point or more 0%
            <133.33% to 100% of trapping point 1%
            <100% to 75% of trapping point 2%
            <75% to 50% trapping point 10%
            <50% to 25% of trapping point 20%
            <25% 40%
            Non-retail credit lines 90% 90%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Non-Controlled Early Amortisation

          • PIB 4.14.62

            In regard to non-Controlled Early AmortisationG , an Authorised FirmG must apply the same steps as set out at Rules PIB 4.14.59 to PIB 4.14.61 and determine appropriate segments and apply the corresponding conversion factors as set out in the following table:

            Non-Controlled Early AmortisationG features
              Uncommitted Committed
            Retail Credit Lines 3 Month average Excess SpreadG CCF 100%
            133.33% of trapping point or more 0%
            <133.33% to 100% of trapping point 5%
            <100% to 75% of trapping point 15%
            <75% to 50% trapping point 50%
            <50% of trapping point 100%
            Non-retail credit lines 100% 100%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Transfers to Special Purpose Entities (SPEs)

          • PIB 4.14.63

            An Authorised FirmG need not include in its calculation of Capital ResourcesG or Credit RWAG amounts, assets transferred to:

            (a) an SPE; or
            (b) any PersonG , if the transfer is in connection with a securitisation under which the IssuerG of the SecuritiesG is an SPE;

            provided that:

            (c) the Authorised FirmG does not own any share or proprietary interest in the SPE;
            (d) no more than one member of the Governing BodyG of the SPE is an officer, partner, or EmployeeG of the Authorised FirmG ;
            (e) the SPE does not have a name that implies any connection with the Authorised FirmG or any other member of the Authorised Firm'sG GroupG ;
            (f) the Authorised FirmG does not fund the SPE except where permitted under the requirements for Credit EnhancementG below;
            (g) the Authorised FirmG does not provide temporary finance to the SPE to cover cash shortfalls arising from delayed payments or non-performance of loans transferred except where it meets the requirements for liquidity support below;
            (h) the Authorised FirmG does not bear any of the recurring expenses of the SPE; and
            (i) any agreements between the Authorised FirmG and the SPE are at market rates and at arm's length.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.64

            Where an OriginatorG acts as Underwriter for the SecuritiesG issued, the underlying items will not be regarded as being transferred until 90% of the total issuance has been sold to third parties.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Dealing

          • PIB 4.14.65

            An OriginatorG dealing in SecuritiesG which would attract a Credit Quality GradeG of 4 or better and issued by an SPE must deduct any holdings in such SecuritiesG from its CET1 Capital unless the holding is subject to:

            (a) an ongoing limit of 3% of the SecuritiesG issued; and
            (b) a limit of 10% of the SecuritiesG issued for a period of five business days:
            (i) immediately following close of the transaction; or
            (ii) in the case of Revolving SecuritisationsG only, at the beginning of the scheduled amortisation period.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.66

            An Authorised FirmG acting as the OriginatorG and holding in excess of the dealing limits in PIB Rule 4.14.65 must either:

            (a) where the holding is less than 10%, deduct from its CET1 Capital the excess over the dealing limit; or
            (b) where the holding is greater than 10%, regard the transferred risks associated with the items as being back on its balance sheet.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.67

            An Authorised FirmG acting as the OriginatorG must not deal in the SecuritiesG during the amortisation period.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.68

            An Authorised FirmG acting as the SponsorG dealing in the SecuritiesG issued by the SPE must include these SecuritiesG in the calculation of its Credit RWAsG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.14.69

            An Authorised FirmG involved in Synthetic SecuritisationsG must seek individual guidance on a case-by-case basis from the DFSAG regarding the regulatory treatment of such transactions.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Eligible Financial Collateral under FCSA Approach

          • PIB 4.14.70

            An Authorised FirmG which has taken eligible financial CollateralG for an SE ExposureG and is using the FCSA may recognise the effect of the eligible financial CollateralG as follows:

            (a) break down the SE ExposureG into:
            (i) a collateralised portion with E equal to the latest fair market value of the eligible financial CollateralG ; and
            (ii) an uncollateralised portion whose ExposureG value equals the E of the SE ExposureG less the latest fair market value of the eligible financial CollateralG ; and
            (b) apply the CRW that is applicable to the eligible financial CollateralG to the collateralised portion calculated in accordance with (a)(i) to calculate the Credit RWAG amount of the collateralised portion as though the Authorised FirmG had a direct ExposureG to the eligible financial CollateralG ; and
            (c) either:
            (i) apply the CRW that is applicable to the SE ExposureG to the uncollateralised portion calculated in accordance with (a)(ii) to calculate the Credit RWAG amount of the uncollateralised portion; or
            (ii) include the uncollateralised portion as a deduction from CET1 Capital.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.14.70 Guidance

              CollateralG in the context of a SE ExposureG refers to assets used to hedge the Credit RiskG of a securitisation ExposureG rather than the underlying ExposuresG of the securitisation, including CollateralG pledged by an SPE.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 4.15 Concentration Risk

        • Applicability and Limits

          • PIB 4.15.1

            This section applies with respect to Trading BookG transactions as calculated in PIB App2 and Non-Trading BookG transactions as calculated in PIB section 4.8.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.2

            For the purposes of this section an ExposureG that arises in the Trading BookG is calculated by summing the following:

            (a) the net positive position (long positions net of short positions) for each financial instrument as set out in Rules PIB A4.11.10 to PIB A4.11.28;
            (b) the firm's net UnderwritingG ExposuresG for any CounterpartyG ; and
            (c) any other ExposuresG arising from transactions, agreements and contracts that would give rise to CounterpartyG Credit RiskG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.3

            For the purposes of this section an Authorised FirmG must:

            (a) identify its ExposuresG ;
            (b) identify its CounterpartiesG , including whether any are Closely RelatedG to each other or ConnectedG to the Authorised FirmG ;
            (c) measure the size of its ExposuresG ;
            (d) establish the value of its ExposuresG ;
            (e) determine the size of its ExposuresG as a proportion of its Capital ResourcesG ;
            (f) identify whether it has ExposuresG which are subject to the requirements of PIB section 4.13 (Credit RiskG mitigation);
            (g) identify which, if any, of its ExposuresG are exempt in accordance with PIB section A4.11 from the limits set out in Rules PIB 4.15.4 to PIB 4.15.7;
            (h) aggregate its ExposuresG to the same CounterpartyG or group of Closely RelatedG CounterpartiesG or group of Connected CounterpartiesG ;
            (i) monitor and control its ExposuresG on a daily basis within the Concentration RiskG limits; and
            (j) notify the DFSAG immediately of any breach of the limits set out in this section and confirm it in writing.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Large Exposure Limits

          • PIB 4.15.4

            A Large ExposureG of an Authorised FirmG means a total ExposureG which is greater than 10% of the firm's Capital ResourcesG , to any CounterpartyG , Connected CounterpartyG , group of Connected CounterpartiesG , or group of Closely RelatedG CounterpartiesG , whether in the Authorised Firm'sG Trading BookG or Non-Trading BookG , or both.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.5

            Subject to IFR Rule 5.4.15, an Authorised FirmG must ensure that ExposuresG in its Non-Trading BookG and, subject to PIB Rule 4.15.6, Trading BookG to a CounterpartyG or to a group of Closely RelatedG CounterpartiesG or to a group of Connected CounterpartiesG , after taking into account the effect of any eligible Credit RiskG mitigations, do not exceed 25% of its Capital ResourcesG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.6

            Where an Authorised Firm'sG Trading BookG ExposureG to a CounterpartyG or to a group of Closely RelatedG CounterpartiesG or to a group of Connected CounterpartiesG , on its own or when added to any Non-Trading BookG ExposureG , is likely to exceed 25% of its Capital ResourcesG , the Authorised FirmG must immediately give the DFSAG written notice, explaining the nature of its Trading BookG ExposureG and seeking specific guidance from the DFSAG regarding the prudential treatment of any such ExposureG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.7

            Subject to IFR Rule 5.4.16 an Authorised FirmG must ensure that the sum of its Large ExposuresG does not exceed 800% of its Capital ResourcesG .

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.7 Guidance

              1. ExposuresG can arise in the Non-Trading BookG and in the Trading BookG from Credit RiskG (for example on loans and advances) Counterparty RiskG (for example, on unsettled trades and on DerivativeG contracts) and from IssuerG risk (for example, on holdings of equities and bonds).
              2. Some DerivativesG contracts may result in an Authorised FirmG being exposed to an IssuerG as well as the DerivativesG CounterpartyG . For example, a DerivativeG referenced on a SecurityG may result in an ExposureG to the CounterpartyG , to the transaction and to the IssuerG of the underlying SecurityG .
              3. Examples of an ExposureG are actual or potential claims on a CounterpartyG including contingent liabilities arising in the normal course of an Authorised Firm'sG business.
              4. PIB App4 includes further RulesG and GuidanceG on:
              a. fully and partially exempt ExposuresG , ExposuresG to undisclosed CounterpartiesG , parental guarantees and capital maintenance agreements;
              b. identification of ExposuresG ;
              c. identification of Closely RelatedG and Connected CounterpartiesG , and exemptions for Connected CounterpartiesG ;
              d. measuring ExposuresG to CounterpartiesG and IssuersG in relation to DerivativesG , equity indices, and other items; and
              e. country risk ExposureG .
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Exclusions from the Large Exposure Limits

          • PIB 4.15.8

            (1) For the purposes of this section, ExposureG excludes:
            (a) claims and other assets required to be deducted for the purposes of calculating an Authorised Firm'sG Capital ResourcesG ;
            (b) a transaction entered into by an Authorised FirmG as depository or as agent that does not create any legal liability on the part of the Authorised FirmG ;
            (c) claims resulting from foreign exchange transactions where an Authorised FirmG has paid its side of the transaction and the countervalue remains unsettled during the 2 business days following the due payment or due delivery date. After 2 business days the claim becomes an ExposureG ;
            (d) claims arising as a result of money transmission, payment services, clearing and settlement, correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed receipts in funding and other ExposuresG arising from client activity which do not last longer than the following business day;
            (e) in the case of the services outlined in (d) intra-day ExposuresG to Financial InstitutionsG who provide these services are excluded;
            (f) claims resulting from the purchase and sale of SecuritiesG during settlement where both the Authorised FirmG and the CounterpartyG are up to five business days overdue in settling. The five business days include the due payment or due delivery date. After five business days, the claim becomes an ExposureG ; and
            (g) ExposuresG that are guaranteed by the Authorised FirmsG ParentG in accordance with PIB Rule 4.15.18.
            (2) For the purposes of this section, ExposureG to a CCP which carry a 0% CCR in accordance with PIB section 4.8 are excluded.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 4.15.9

          An Authorised FirmG need not include fully exempt ExposuresG , as referred to in PIB Rule A4.11.1 when monitoring compliance with the limits in Rules PIB 4.15.5, PIB 4.15.6 and PIB 4.15.7.

          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Institutional Exemption

          • PIB 4.15.10

            For ExposuresG to a Financial InstitutionG , or a group of Connected CounterpartiesG one of which is a Financial InstitutionG , the total amount of an Authorised Firm'sG ExposuresG may exceed 25% of its Capital ResourcesG , provided those institutions are Investment GradeG (Credit Quality GradesG 1 to 3) and subject to the following:

            (a) ExposuresG to any entities within the group of Connected CounterpartiesG that are not Financial InstitutionsG are limited to 25% of Capital ResourcesG after taking account of Credit RiskG mitigation;
            (b) the ExposuresG must not form part of the Capital ResourcesG of the CounterpartyG ;
            (c) the Counterparty RiskG profile must be subject to review on at least an annual basis; and
            (d) ExposuresG of this nature must not in any case exceed a maximum of US$ 100 million or 100% of Capital ResourcesG , whichever is the lower.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.10 Guidance

              The DFSAG will, in exceptional circumstances, consider an application to waive or modify the limits set out above. In such circumstances the Authorised FirmG will have to make a submission to the DFSAG as to why its specific circumstances would warrant a relaxation of the limits specified in (d) above.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Systems and Controls

          • PIB 4.15.11

            (1) An Authorised FirmG must implement and maintain systems and controls to identify its ExposuresG and effectively manage Concentration RisksG as a result of its activities.
            (2) Such systems and controls in place must be proportionate to the nature, scale and complexity of the Authorised FirmG and must include written policies and procedures to address Concentration RisksG , both on and off balance sheet, which:
            (a) are approved by the Governing BodyG on at least an annual basis; and
            (b) include internal approval limits for ExposuresG as well as limits for the risks associated with specific sectors, geographic location and single economic risk factors.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.11 Guidance

              The DFSAG expects the systems and controls to include:

              a. processes for the tiered approval of ExposuresG based on size, risk profile and complexity;
              b. mechanisms for identifying, recording and monitoring all ExposuresG with particular focus on Large ExposuresG ;
              c. mechanisms in place for the monitoring and control of ExposuresG to CounterpartiesG and GroupsG of Connected CounterpartiesG ;
              d. mechanisms for monitoring and recording ExposuresG within its GroupG ;
              e. mechanisms to monitor CounterpartiesG in the same economic sector and exposed to single economic risks;
              f. mechanisms to identify and control risks arising from single geographic jurisdictions; and
              g. mechanisms to identify risks arising from related activities or commodities.
              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Recognition of Credit Risk Mitigations

          • PIB 4.15.12

            For the purposes of this section, an Authorised FirmG may reduce the value of its ExposuresG , at its discretion, by any one or more of the following:

            (a) the amount of any specific provision made, where the provision relates to the risk of a credit loss occurring on that ExposureG and is not held as part of a general provision or reserve against its Credit RisksG ;
            (b) NettingG its claims on and liabilities to a CounterpartyG , provided that the conditions in PIB section 4.13 of Credit RiskG mitigation are met;
            (c) the amount of CollateralG held against its ExposuresG , where that CollateralG is of a type listed based on the FCSA and FCCA approaches and meeting the requirements under PIB section 4.13;
            (d) the amount of any eligible guarantees as permitted under PIB section 4.13.9;
            (e) the value of a Credit DerivativeG , where the Credit DerivativeG is an instrument included in PIB Rule 4.13.11 and the transaction meets the conditions set out in that section; and
            (f) the effects of transactions transferring Credit RisksG from the Authorised FirmG to another party through securitisation, provided that the conditions in PIB section 4.14 are met.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.13

            An Authorised FirmG intending to utilise any of the provisions contained in PIB section 4.13 (Credit RiskG mitigation) for the purposes of reducing ExposureG values should have in place policies and procedures addressing the following:

            (a) risks arising from maturity mismatches between ExposuresG and any credit protection on those ExposuresG ;
            (b) the Concentration RiskG arising from the application of Credit RiskG mitigation techniques, including indirect Large ExposuresG — for example to a single IssuerG of SecuritiesG taken as CollateralG ; and
            (c) the conduct of stress testing on Credit RiskG mitigation taken as CollateralG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.14

            Where an Authorised FirmG has availed itself of the reductions to ExposureG values as set out in PIB A4.11G the Authorised FirmG must calculate the ExposureG as a percentage of its Capital ResourcesG on both a gross and net basis.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.15

            An Authorised FirmG that avails itself of the reduction in its ExposureG value through the application of PIB Rule A4.11 must conduct periodic stress tests on its ExposuresG against the realisable value of any CollateralG considered under with the FCSA or FCCA.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.16

            Where the value of the CollateralG under the stress scenario is lower than the value applied under PIB Rule 4.15.12 the lower value should be used when determining the ExposureG value for the purposes of this section.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.16 Guidance

              Such stress tests should include market value changes of underlying CollateralG , risks relating to liquidity and realisation of such CollateralG in stress scenarios. An assessment of the impact of any such changes on the ExposureG value and the capital position of the Authorised FirmG should be conducted. Stress testing of these positions should be conducted at least once a year.

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB 4.15.17

            An Authorised FirmG must document its policy for the use of any of the exclusions in PIB Rule 4.15.12.

            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB 4.15.17 Guidance

              Such policy should include risks such as maturity mismatches, stress testing of CollateralG values, indirect ExposuresG arising from Credit RiskG mitigation, such as mitigation provided on ExposuresG by the same CounterpartyG .

              Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Treatment of Parental Guarantees

          • PIB 4.15.18

            An Authorised FirmG may exclude an ExposureG from the Concentration RiskG limits set out in Rules PIB 4.15.5 to PIB 4.15.7 if the Authorised Firm'sG ParentG ;

            (a) is set to increase, on the basis of a legally binding agreement, the Authorised Firm'sG Capital ResourcesG , promptly and on demand, by:
            (i) an amount that is sufficient to reverse completely the effect of any loss the Authorised FirmG may sustain in connection with that ExposureG ; or
            (ii) the amount required to ensure that the Authorised FirmG complies with its Capital RequirementG set out in PIB chapter 3; or
            (b) guarantees the ExposureG to a CounterpartyG or to a group of Closely RelatedG CounterpartiesG which are not ConnectedG to the Authorised FirmG only if the following conditions are met:
            (i) the guarantee is to be provided by the Authorised Firm'sG ParentG , or regulated member of its GroupG ;
            (ii) the criteria for guarantees must be in line with the Credit RiskG mitigation requirements as set out in PIB section 4.13;
            (iii) the entity providing the guarantee must be a bank regulated to standards acceptable to the DFSAG ;
            (iv) the total amount of guarantees provided to the Authorised FirmG must be less than 10% of the ParentG (or other) Authorised Firm'sG Capital ResourcesG ;
            (v) the ParentG must be rated as a Credit Quality GradeG of 1 or 2 by a recognised credit rating agency;
            (vi) the Authorised FirmG must provide confirmation from the home state Financial Services RegulatorG that it is satisfied that the ParentG Authorised FirmG has sufficient resources to provide such guarantees and has no objection to the provision of such guarantees;
            (vii) the Authorised FirmG should provide an annual confirmation that there are no changes to the enforceability of such guarantees; and
            (viii) the Authorised FirmG must notify the DFSAG when such guarantees represent 200%, 400% and 600% of Capital ResourcesG . The overall Large ExposureG limit of 800% will apply.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]