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