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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
Recognised Jurisdictions and Funds
Declaration Notices
Financial Markets Tribunal
Rulebook Modules
Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER34/12-19]
Sourcebook Modules
Consultation Papers
Policy Statements
DFSA Codes of Practice
Amendments to Legislation
Media Releases

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  • 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]