Home   Browse contents   View updates   Search  
     Quick search
Go
   

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]
Sourcebook Modules
Consultation Papers
Policy Statements
DFSA Codes of Practice
Amendments to Legislation
Media Releases
Notices
Financial Markets Tribunal
Archive

BackText onlyPrint

You need the Flash plugin.

Download Macromedia Flash Player



  • PIB 5 Market Risk

    • Introduction

      • PIB 5 Guidance

        1. This chapter addresses the regulatory requirements in respect of managing the Market RiskG exposures of an Authorised FirmG . Market RiskG refers to the risk of incurring losses on positions held by an Authorised FirmG with trading intent, due to adverse changes in market prices or in underlying value drivers. This chapter aims to ensure that an Authorised FirmG engaging in activities exposing the firm to risks associated with potential adverse movements in market prices adopts appropriate and effective risk management practices and holds regulatory capital of the right quality that is also commensurate with the risks involved.
        2. This chapter includes requirements that an Authorised FirmG :
        a. implement a comprehensive Market RiskG management framework to manage, measure and monitor Market RiskG commensurate with the nature, scale and complexity of the firm's operations; and
        b. calculate the Market Risk Capital RequirementG and hold the same.
        3. The chapter allows the use of standard pre-defined methodologies for estimating the capital requirement and also allows the use of DFSAG -approved internal models to calculate a firm's Market Risk Capital RequirementG . The chapter covers RulesG for determining Market Risk Capital RequirementG on exposures involving interest rate risk, equity risk, foreign exchange risk, commodities risk, options risk, collective investment fund risk and securities underwriting risk.
        4. PIB Appendix 5 provides the detailed requirements, parameters, calculation methodologies and formulae in respect of the primary requirements outlined in PIB chapter 5. PIB Appendix 5 also provides detailed guidance on criteria for approval of internal models for calculation of Market Risk Capital RequirementG , incorporation of incremental risk charges in internal models, if allowed and guidance on the required level of stress testing.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.1 Application

      • PIB 5.1.1

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

        (a) sections PIB 5.2 to PIB 5.11 apply to an Authorised FirmG in CategoryG 1 or 2;
        (b) sections PIB 5.2 and PIB 5.6 apply to an Authorised FirmG in CategoryG 3A; and
        (c) sections PIB 5.2, PIB 5.3 and PIB 5.5 to PIB 5.11 apply to an Authorised FirmG in CategoryG 5.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 5.1.1 Guidance

          1. PIB Rule 5.3.1 provides that the Market Risk Capital RequirementG of an Authorised FirmG is calculated as the sum of a number of subsidiary Capital RequirementsG . Sections PIB 5.4 to PIB 5.10 set out the manner in which each of those subsidiary Capital RequirementsG must be calculated, monitored and controlled by an Authorised FirmG .
          2. In addition to complying with the applicable RulesG in PIB chapter 5, 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 5.4.8 to IFR 5.4.14 to calculate the Market RiskG for those Islamic ContractsG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.2 Market Risk Systems and Controls

      • PIB 5.2.1

        (1) An Authorised FirmG in CategoryG 1, 2, 3A or 5 must implement and maintain a Market RiskG policy which enables it to identify, assess, control and monitor Market RiskG .
        (2) The policy must be documented and include the Authorised Firm'sG risk appetite and how it identifies, assesses, mitigates, controls and monitors that risk.
        (3) An Authorised FirmG must:
        (a) ensure that its risk management systems enable it to implement the Market RiskG policy;
        (b) identify, assess, mitigate, control and monitor its Market RiskG ; and
        (c) review and update the policy at intervals that are appropriate to the nature, scale and complexity of its activities.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 5.2.1 Guidance

          GuidanceG in respect of what an Authorised Firm'sG Market RiskG policy should include is provided in PIB section A5.1.

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

    • PIB 5.3 Calculation of the Market Risk Capital Requirement

      • PIB 5.3.1

        An Authorised FirmG must calculate its Market Risk Capital RequirementG as the sum of the following components:

        (a) Interest Rate Risk Capital RequirementG ;
        (b) Equity Risk Capital RequirementG ;
        (c) Foreign Exchange Risk Capital RequirementG ;
        (d) Commodities Risk Capital RequirementG ;
        (e) Option Risk Capital RequirementG ;
        (f) Collective Investment FundG Risk Capital RequirementG ; and
        (g) Securities Underwriting Capital RequirementG .
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB 5.3.1 Guidance

          1. Detailed RulesG and GuidanceG in respect of the Market Risk Capital RequirementG and each of its components in (a) to (g) are contained in this chapter.
          2. RulesG and GuidanceG in respect of calculating Market RiskG for Islamic ContractsG are contained in IFR chapter 5.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.4 Interest Rate Risk Capital Requirement

      • PIB 5.4.1

        An Authorised FirmG in CategoryG 1 or 2 must calculate its Interest Rate Risk Capital RequirementG in respect of Trading BookG transactions:

        (a) by applying its internal Market RiskG model which has been approved by the DFSAG for this purpose; or
        (b) by applying the RulesG set out in PIB section A5.2.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.5 Equity Risk Capital Requirement

      • PIB 5.5.1

        An Authorised FirmG in CategoryG 1, 2 or 5, must calculate its Equity Risk Capital RequirementG in respect of Trading BookG transactions:

        (a) by applying its internal Market RiskG Model which has been approved by the DFSAG for this purpose; or
        (b) by applying the RulesG set out in PIB section A5.3.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.6 Foreign Exchange Risk Capital Requirement

      • PIB 5.6.1

        An Authorised FirmG in CategoryG 1, 2, 3A or 5 must, subject to PIB Rule 5.6.2, calculate its Foreign Exchange Risk Capital RequirementG in respect of Trading BookG and Non-Trading BookG foreign exchange positions by:

        (a) applying its internal Market RiskG model which has been approved by the DFSAG for this purpose; or
        (b) applying the RulesG in PIB section A5.4.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 5.6.2

        An Authorised FirmG need not calculate a Foreign Exchange Risk Capital RequirementG if:

        (a) its Foreign CurrencyG business, defined as the greater of the sum of its gross long positions and the sum of its gross short positions in all Foreign CurrenciesG , does not exceed 100% of Capital ResourcesG as defined in PIB chapter 3; and
        (b) its overall net open position as defined in PIB Rule A5.4.4 does not exceed 2% of its Capital ResourcesG as defined in PIB chapter 3.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.7 Commodities Risk Capital Requirement

      • PIB 5.7.1

        An Authorised FirmG in CategoryG 1, 2 or 5 must calculate its Commodities Risk Capital RequirementG in respect of Trading BookG and Non-Trading BookG commodity positions by:

        (a) applying its internal Market RiskG model which has been approved by the DFSAG for this purpose; or
        (b) applying the RulesG set out in PIB section A5.5.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.8 Option Risk Capital Requirement

      • PIB 5.8.1

        An Authorised FirmG in CategoryG 1, 2 or 5 must calculate an Option Risk Capital RequirementG if it has positions in OptionsG in its Trading BookG by:

        (a) applying its internally developed Market RiskG model which has been approved by the DFSAG for this purpose; or
        (b) by applying the RulesG set out in PIB section A5.6.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.9 Collective Investment Fund Risk Capital Requirement

      • PIB 5.9.1

        An Authorised FirmG in CategoryG 1, 2 or 5 must calculate its Collective Investment FundG Risk Capital RequirementG in respect of Trading BookG positions in UnitsG in a Collective Investment FundG by:

        (a) applying its internally developed Market RiskG model which has been approved by the DFSAG for this purpose; or
        (b) applying the RulesG set out in PIB section A5.7.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.10 Securities Underwriting Capital Requirement

      • PIB 5.10.1

        This section applies to an Authorised FirmG in CategoryG 1, 2 or 5 in respect of Trading BookG SecuritiesG UnderwritingG positions.

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

        • PIB 5.10.1 Guidance

          1. This section sets out a framework for calculating the amount of Capital RequirementG when an Authorised FirmG has commitments to underwrite an issue of SecuritiesG , and the associated risk management standards which an Authorised FirmG UnderwritingG SecuritiesG must meet.
          2. UnderwritingG is defined in the Glossary as an arrangement under which a party agrees to buy, before issue, a specified quantity of SecuritiesG in an issue of SecuritiesG on a given date and at a given price, if no other party has purchased or acquired them.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 5.10.2

        An Authorised FirmG must establish and maintain such systems and controls to monitor and manage its UnderwritingG and sub-underwriting business as are appropriate to the nature, scale and complexity of its UnderwritingG and sub-underwriting business.

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

        • PIB 5.10.2 Guidance

          1. An Authorised FirmG should take reasonable steps to:
          a. allocate responsibility for the management of its UnderwritingG and sub-underwriting business;
          b. allocate adequate resources of the Authorised FirmG to monitor and control its UnderwritingG and sub-underwriting business;
          c. satisfy itself that its systems to monitor its ExposureG to a CounterpartyG will calculate, revise and update its UnderwritingG ExposureG to each CounterpartyG and its Capital RequirementsG ;
          d. satisfy itself of the suitability of each person who performs functions for it in connection with the Authorised Firm'sG UnderwritingG business, having regard to the person's skill and experience; and
          e. satisfy itself that its procedures and controls to monitor and manage its UnderwritingG business address the capacity of sub-underwriters to meet sub-underwriting commitments.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 5.10.3

        (1) An Authorised FirmG must calculate a Securities Underwriting Capital RequirementG if it has a commitment to underwrite or sub-underwrite an issue of SecuritiesG .
        (2) An Authorised FirmG has a commitment to underwrite or sub-underwrite an issue of SecuritiesG where:
        (a) it gives a commitment to an IssuerG of SecuritiesG to underwrite an issue of SecuritiesG ;
        (b) it gives a commitment to sub-underwrite an issue of SecuritiesG ; or
        (c) it is a member of a syndicate or GroupG that gives a commitment to an IssuerG to underwrite an issue of SecuritiesG or a commitment to sub-underwrite an issue of SecuritiesG .
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 5.10.4

        An Authorised FirmG must regard a commitment to underwrite an issue of SecuritiesG , subject to any right set out in PIB Rule 5.10.6, as the initial commitment to underwrite from the earlier of:

        (a) the time the Authorised FirmG signs an agreement with the IssuerG of SecuritiesG to underwrite those SecuritiesG ; or
        (b) the time the price and allocation of the issue are set.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 5.10.5

        Where the issue price has not been fixed, an Authorised FirmG must use the highest estimate of the price and its allocation for the purpose of calculating its initial gross commitment.

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

      • PIB 5.10.6

        If an Authorised FirmG has at its discretion an irrevocable right to withdraw from an UnderwritingG commitment, exercisable within a certain period, the commitment commences when that right expires.

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

      • PIB 5.10.7

        An Authorised FirmG must calculate its Securities Underwriting Risk Capital RequirementG by:

        (a) applying its internally developed Market RiskG model which has been approved by the DFSAG for this purpose; or
        (b) applying the Rules in PIB section A5.8.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB 5.11 Use of Internal Market Risk Models

      • PIB 5.11.1

        An Authorised FirmG in CategoryG 1, 2 or 5 may use an internal model to calculate its Market Risk Capital RequirementG or any components of its Market Risk Capital RequirementG if its internal model and its use have been approved in writing by the DFSAG .

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

        • PIB 5.11.1 Guidance

          GuidanceG in respect of criteria for use of internally developed Market RiskG models is provided in PIB section A5.9.

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

      • PIB 5.11.2

        If the DFSAG approves the use of an internal model, it may:

        (a) impose, withdraw or amend at any time conditions in respect of the use of the internal model; and
        (b) withdraw approval if it forms the view that the internal model or its use is no longer suitable for the calculation of the Authorised Firm'sG Market Risk Capital RequirementG or any component of it.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB 5.11.3

        An Authorised FirmG which uses an internal model in accordance with PIB Rule 5.11.1 must have in place a rigorous and comprehensive stress-testing programme which meets the criteria set out in PIB Rule A5.9.4.

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

      • PIB 5.11.4

        An Authorised FirmG that has received approval for the use of an internal model may only revert to calculating its Market Risk Capital RequirementG or any component of it in accordance with PIB App5 with the prior written consent of the DFSAG .

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

        • PIB 5.11.4 Guidance

          1. This section sets out the conditions under which an Authorised FirmG is permitted to use an internal model to calculate its Market Risk Capital RequirementG or any component of its Market Risk Capital RequirementG . An Authorised FirmG that wishes to use an internal model to calculate any part of this requirement is required to apply to the DFSAG . Internal models will commonly permit more extensive NettingG of long and short positions and have greater risk sensitivity.
          2. In assessing whether to give approval, the DFSAG will consider an Authorised Firm'sG risk management standards; the quantitative model standards; the stress-testing and back-testing standards and the process surrounding the calculation of the appropriate regulatory Capital RequirementG .
          3. The DFSAG will usually only give its approval for the use of an internal risk model if:
          a. the use of the model to calculate the Market Risk Capital RequirementG has been approved by another appropriate regulator or the DFSAG is satisfied having been provided by the Authorised FirmG with such opinions from independent experts as it may require, that the model adequately addresses Market RiskG requirements;
          b. use of the methodology is integrated into the governance and control framework of the Authorised FirmG . Specifically, the Governing BodyG and senior management of the Authorised FirmG receives and reviews appropriate reports in respect of the entity;
          c. it is satisfied that the Authorised Firm'sG risk management system is conceptually sound and is implemented with integrity;
          d. the Authorised FirmG has sufficient numbers of staff skilled in the use of sophisticated models not only in the trading area but also in the risk control, audit, and if necessary, back office areas;
          e. the Authorised Firm'sG models have a proven track record of reasonable accuracy in measuring risk; and
          f. the Authorised FirmG regularly conducts stress tests.
          4. In determining whether an internal value at risk (VaR) model meets the standard for approval, the DFSAG will apply the criteria set out in PIB section A5.9, which are based on the Basel Market RiskG Capital Amendment 1996 and Basel Revisions to the Basel II Market RiskG framework 2009 and which can be grouped under the following headings:
          a. qualitative standards;
          b. specification of Market RiskG factors;
          c. quantitative standards;
          d. adjustments to Market Risk Capital RequirementsG ;
          e. stress testing; and
          f. combination of internally developed models and the Standardised Methodology.
          5. In addition to value-at-risk models, the DFSAG recognises option risk aggregation models and interest rate 'pre-processing' or sensitivity models, as set out under the EU's Capital Adequacy Directive (these are the so-called 'CAD1 models').
          6. Option risk aggregation models analyse and aggregate options risks for interest rate, equity, foreign exchange and commodity options.
          7. Interest rate pre-processing models are used to calculate weighted positions for inclusion in an Authorised Firm'sG interest rate Market Risk Capital RequirementG calculation under the Duration MethodG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]