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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
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Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER33/02-19]
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  • PIB App4 Credit Risk

    • PIB A4.1 Credit Risk Systems and Controls

      • PIB A4.1 Guidance

        1. Depending on an Authorised Firm'sG nature, scale, frequency, and complexity of Credit RiskG granted or incurred, the Credit RiskG policy of an Authorised FirmG should address the following elements:
        a. how, with particular reference to its activities, the Authorised FirmG defines and measures Credit RiskG ;
        b. the Authorised Firm'sG business aims in incurring Credit RiskG including:
        i. identifying the types and sources of Credit RiskG to which the Authorised FirmG wishes to be exposed (and the limits on that ExposureG ) and those to which the Authorised FirmG wishes not to be exposed;
        ii. specifying the level of diversification required by the Authorised FirmG and the Authorised Firm'sG tolerance for risk concentrations and the limits on those ExposuresG and concentrations; and
        iii. stating the risk-return that the Authorised FirmG is seeking to achieve on Credit RiskG ExposuresG ;
        c. types of facilities to be offered, along with ceilings, pricing, profitability, maximum maturities and maximum debt-servicing ratios for each type of lending;
        d. a ceiling for the total loan portfolio, in terms, for example, of the loan-to-deposit ratio, undrawn commitment ratio, a maximum dollar amount or a percentage of capital base;
        e. portfolio limits for maximum aggregate ExposuresG by country, industry, category of borrower/CounterpartyG (e.g. banks, non-bank financial institutions, corporates and retail), product (e.g. property lending), GroupsG of related parties and single borrowers;
        f. limits, terms and conditions, approval and review procedures and records kept for ConnectedG lending — all Authorised FirmsG should have a formal policy statement, endorsed by the Governing BodyG , on such lending covering these matters;
        g. types of acceptable CollateralG , loan-to-value ratios and the criteria for accepting guarantees; and
        h. how Credit RiskG is assessed both when credit is granted or incurred and subsequently, including how the adequacy of any security and other risk mitigation techniques are assessed;
        i. the detailed limit structure for Credit RiskG , which should:
        i. address all key risk factors, including intra-GroupG ExposuresG ;
        ii. be commensurate with the volume and complexity of activity; and
        iii. be consistent with the Authorised Firm'sG business aims, historical performance, and the level of capital the Authorised FirmG is willing to risk;
        j. procedures for:
        i. approving new products and activities which give rise to Credit RiskG ;
        ii. regular risk position and performance reporting;
        iii. limit exception reporting and approval; and
        iv. identifying and dealing with problem ExposuresG ;
        k. the allocation of responsibilities for implementing the Credit RiskG policy and for monitoring adherence to, and the effectiveness of, the policy; and
        l. the required information systems, staff and other resources.
        2. The Credit RiskG policy should emphasize the principles of prudence and should be enforced consistently. The policy and its implementation should ensure that credit facilities are only granted to credit-worthy customers and that risk concentrations are avoided.
        3. The Credit RiskG strategy and policy need to be clearly disseminated to, and understood by all relevant staff.
        4. The Credit RiskG policy of an Authorised FirmG should clearly specify the delegation of its credit approval authorities. Credit authority thus delegated should be appropriate for the products or portfolios assigned to the credit committee or individual credit officers and should be commensurate with their credit experience and expertise. An officer's credit authority may, however, be increased on the basis of his or her track record. An Authorised FirmG should ensure that credit authority is required for acquiring any types of credit ExposuresG , including the use of Credit DerivativesG for hedging or income generation.
        5. Credit authority delegated to the credit committee and each credit officer should be subject to regular review to ensure that it remains appropriate to current market conditions and the level of their performance.
        6. An Authorised Firm'sG remuneration policies should be consistent with its Credit RiskG strategy. The policies should not encourage officers to generate short-term profits by taking an unacceptably high level of risk.

        Counterparty RiskG assessment

        7. The Authorised FirmG should make a suitable assessment of the risk profile of its CounterpartiesG . The factors to be considered will vary according to both the type of credit and CounterpartyG such as whether the CounterpartyG is a company or a sovereign CounterpartyG and may include:
        a. the purpose of the credit and the source of repayment;
        b. an assessment of the skill, integrity and quality of management and overall reputation of the CounterpartyG ;
        c. the legal capacity of the CounterpartyG to assume the liability to the Authorised FirmG ;
        d. an assessment of the nature and amount of risk attached to the CounterpartyG in the context of the industrial sector or geographical region or country in which it operates and the potential impact on the CounterpartyG of political, economic and market changes; this assessment may include consideration of the extent and nature of the Counterparty'sG other financial obligations;
        e. the Counterparty'sG repayment history as well as an assessment of the Counterparty'sG current and future capacity to repay obligations based on financial statements, financial trends, cash flow projections and the potential impact of adverse economic scenarios;
        f. an analysis of the risk-return trade-off, with regard to the proposed price of the credit facility;
        g. the proposed terms and conditions attached to the granting of credit, including on-going provision of information by the CounterpartyG , covenants attached to the facility, the adequacy and enforceability of CollateralG and guarantees; and
        h. the Authorised Firm'sG existing ExposureG to the individual CounterpartyG , sector, country or product and the availability of credit given ExposureG limits.
        8. An Authorised FirmG should document any variation from the usual credit policy.
        9. An Authorised FirmG involved in loan syndications or consortia should not rely on other parties' assessments of the Credit RisksG involved but should conduct a full assessment against its own Credit RiskG policy.
        10. An Authorised FirmG granting credit to obligors in other countries should be cognisant of the additional risks — country risk and transfer risk — involved in such credits. An Authorised FirmG should therefore consider the environment — economic and political — in the relevant countries, the potential effect of changes thereto on the obligors' ability to service the credit and the contagion effects in regions where economies are closely related.
        11. The exception reporting should be adequately supported by a management reporting system whereby relevant reports on the credit portfolio are generated to various levels of management on a timely basis.
        12. Connected CounterpartiesG should be identified and the procedures for the management of the combined Credit RiskG considered. It may be appropriate for Authorised FirmsG to monitor and report the aggregate ExposureG against combined limits in addition to monitoring the constituent ExposuresG to the individual CounterpartiesG .
        13. An Authorised FirmG should consider whether it needs to assess the credit-worthiness of suppliers of goods and services to whom it makes material prepayments or advances.

        Risk assessment: DerivativeG CounterpartiesG

        14. An Authorised FirmG should include in its Credit RiskG policy an adequate description of:
        a. how it determines with which derivative CounterpartiesG to do business;
        b. how it assesses and continues to monitor the credit-worthiness of those CounterpartiesG ;
        c. how it identifies its actual and contingent ExposureG to the CounterpartyG ; and
        d. whether and how it uses credit loss mitigation techniques, e.g. margining, taking security or CollateralG or purchasing credit insurance.
        15. In assessing its contingent ExposureG to a CounterpartyG , the Authorised FirmG should identify the amount which would be due from the CounterpartyG if the value, index or other factor upon which that amount depends were to change.
        16. An Authorised FirmG should clearly specify the delegation of its credit approval authorities. Credit authority thus delegated should be appropriate for the products or portfolios assigned to the credit committee or individual credit officers and should be commensurate with their credit experience and expertise. An officer's credit authority may, however, be increased on the basis of his her track record. An Authorised FirmG should ensure that credit authority is required for acquiring any types of credit ExposuresG , including the use of Credit DerivativesG for hedging or income generation.
        17. Credit authority delegated to the credit committee and each credit officer should be subject to regular review to ensure that it remains appropriate to current market conditions and the level of their performance.

        Credit approval procedures

        18. An Authorised FirmG should adhere closely to the "Know Your Customer" principle and should not lend purely on name and relationship without a comprehensive assessment of the credit quality of the borrower.
        19. Credit decisions should be supported by adequate evaluation of the borrower's repayment ability based on reliable information. Sufficient and up-to-date information should continue to be available to enable effective monitoring of the account.
        20. All credits should be granted on an arm's length basis. Credits to related borrowers should be monitored carefully and steps taken to control or reduce the risks of ConnectedG lending.
        21. An Authorised FirmG should not rely excessively on CollateralG or guarantees as Credit RiskG mitigants. Such Credit RiskG mitigants may provide secondary protection to the lender if the borrower defaults, the primary consideration for credit approval should be the borrower's debt-servicing capacity.
        22. An Authorised FirmG should be sensitive to rapid expansion of specific types of lending. Such trends may often be accompanied by deterioration of credit standards and thus merit increased focus on more marginal borrowers.
        23. An Authorised FirmG should ensure through periodic independent audits that the credit approval function is being properly managed and that credit ExposuresG comply with prudential standards and internal limits. The results of such audits should be reported directly to the Governing BodyG , the credit committee or senior management as appropriate.

        Risk control

        24. An Authorised FirmG should consider setting credit limits for maximum ExposuresG to single and Connected CounterpartiesG , as well as limits for aggregate ExposuresG to economic sectors, geographic areas, and on total Credit RiskG arising from specific types of products. By limiting ExposuresG in these categories, an Authorised FirmG can manage credit ExposureG more carefully and avoid excessive concentrations of risk.
        25. The Credit RiskG policy of an Authorised FirmG should include a policy to control and monitor Large ExposuresG and other risk concentrations. An Authorised FirmG should carefully manage and avoid excessive risk concentrations of various kinds. These include ExposureG to:
        a. individual borrowers (in particular ExposureG exceeding 10% of the firm's capital base);
        b. GroupsG of borrowers with similar characteristics, economic and geographical sectors; and
        c. types of lending with similar characteristics (e.g. those based on assets with similar price behaviour).
        26. Notwithstanding the Concentration RiskG limit specified as part of the prudential RulesG on Large ExposuresG , Authorised FirmsG should exercise particular care in relation to facilities exceeding 10% of capital base.
        27. Authorised FirmsG should recognise and control the Credit RiskG arising from their new products and services. Well in advance of entering into business transactions involving new types of products and activities, they should ensure that they understand the risks fully and have established appropriate Credit RiskG policies, procedures and controls, which should be approved by the Governing BodyG or its appropriate delegated committee. A formal risk assessment of new products and activities should also be performed and documented.
        28. An Authorised FirmG in CategoryG 1, 2, 3A or 5 is also subject to concentration limits and notification requirements as spelt out in PIB chapter 4.

        Risk measurement

        29. An Authorised FirmG should measure its Credit RiskG using a robust and consistent methodology, which should be described in its Credit RiskG policy. The Authorised FirmG should consider whether the measurement methodology should be back-tested and the frequency of any such back-testing.
        30. An Authorised FirmG should also be able to measure its total ExposureG across the entire credit portfolio or within particular categories such as ExposuresG to particular industries, economic sectors or geographical areas.
        31. Where an Authorised FirmG is a member of a GroupG , the GroupG should be able to monitor credit ExposuresG on a consolidated basis.
        32. An Authorised FirmG should have the capability to measure its credit ExposureG to individual CounterpartiesG on at least a daily basis.
        33. Authorised FirmsG should analyse their credit portfolios to identify material inter-dependencies which can exaggerate risk concentrations. The importance can be illustrated by the contagion effects that a substantial decline in property or stock prices may have on the default rate of those commercial and industrial loans which rely heavily on such types of CollateralG .
        34. Authorised FirmsG should establish a system of regular independent credit and compliance audits. These audits should be performed by independent parties, e.g. internal audit and compliance, which report to the Governing BodyG or the audit committee.
        35. Credit audits should be conducted to assess individual credits on a sampling basis and the overall quality of the credit portfolio. Such audits are useful for evaluating the performance of account officers and the effectiveness of the credit process. They can also enable Authorised FirmsG to take early measures to protect their loans.

        Risk monitoring

        36. An Authorised FirmG should implement an effective system for monitoring its Credit RiskG , which should be described in its Credit RiskG policy. The system may monitor the use of facilities, adherence to servicing requirements and covenants, and monitor the value of CollateralG and identify problem accounts.
        37. An Authorised FirmG should consider the implementation of a system of management reporting which provides relevant, accurate, comprehensive, timely and reliable Credit RiskG reports to relevant functions within the Authorised FirmG .
        38. Adequacy and sophistication of Credit RiskG measurement tools required depends on the complexity and degree of the inherent risks of the products involved. An Authorised FirmG should have information systems and analytical techniques that provide sufficient information on the risk profile and structure of the credit portfolio. These should be flexible to help Authorised FirmG to identify risk concentrations. To achieve this, an Authorised FirmG system should be capable of analysing its credit portfolio by the following characteristics:
        a. size of ExposureG ;
        b. ExposureG to GroupsG of related borrowers;
        c. products;
        d. sectors, e.g. geographic, industrial;
        e. borrowers' demographic profile for consumer credits, e.g. age or income group, if appropriate;
        f. account performance;
        g. internal credit ratings;
        h. outstandings versus commitments; and
        i. types and coverage of CollateralG .
        39. An Authorised FirmG should have procedures for taking appropriate action according to the information within the management reports, such as a review of CounterpartyG limits.
        40. Particular attention should be given to the monitoring of credit that does not conform to usual Credit RiskG policy, or which exceeds predetermined credit limits and criteria, but is sanctioned because of particular circumstances. Unauthorised exceptions to policies, procedures and limits should be reported in a timely manner to the appropriate level of management.
        41. Individual credit facilities and overall limits and sub-limits should be periodically reviewed in order to check their performance and appropriateness for both the current circumstances of the CounterpartyG and in the Authorised Firm'sG current internal and external economic environment. The frequency of review will usually be more intense for higher-risk CounterpartiesG or larger ExposuresG or in fluctuating economic conditions.
        42. An Authorised FirmG should have in place a system for monitoring the overall quality of its Credit RiskG ExposuresG under normal and stressful conditions. There should also be a reporting system which alerts management to aggregate ExposuresG approaching various pre-set portfolio limits.
        43. An Authorised FirmG should be mindful of business and economic cycles and regularly stress-test their portfolios against adverse market scenarios. Adequate contingency planning should be developed in conjunction with stress-testing to address the possibility of crises developing in a very rapid fashion.
        44. Appropriate stress testing of credit ExposuresG can be an essential part of the credit management process. Examination of the potential effects of economic or industry downturns, market events, changes in interest rates, changes in foreign exchange rates and changes in liquidity conditions can provide valuable information about an Authorised Firm'sG Credit RiskG . This information can be utilised to inform the Authorised Firm'sG on-going credit strategy.
        45. As new techniques for Credit RiskG management, monitoring and reporting are developed, the Authorised FirmG should ensure they are tested and evaluated before undue reliance is placed upon them.
        46. Where the account officer for a credit (or customer relationship manager, branch manager or similar) moves on, the incoming officer should carry out a take-over review. The review should cover inter alia the credit-worthiness of the borrowers, the adequacy of the documentation, compliance with covenants, performance of each loan and the existence and value of any CollateralG .

        Problem ExposuresG

        47. An Authorised FirmG should have processes for the timely identification and management of problem ExposuresG . These processes should be described in the Credit RiskG policy.
        48. An Authorised FirmG involved in providing credit should establish a dedicated unit to handle the recovery and work-out of problem loans and should establish policies for the referral of loans to this unit.
        49. An Authorised FirmG should ensure that its loan portfolio is properly classified and has an effective early-warning system for problem loans.
        50. An Authorised FirmG should develop and implement internal risk rating systems for managing Credit RiskG . The rating system should be consistent with the nature, size and complexity of the Authorised Firm'sG activities. In using internal risk ratings, an Authorised FirmG should seek to achieve a high granularity in the rating system and adopt multiple grades for loans that are not yet irregular and to develop the ability to track the migration of individual loans through the various internal credit ratings.
        51. Depending on the size and nature of the Authorised FirmG , it may be appropriate for problem ExposuresG to be managed by a specialised function, independent of the functions that originate the business or maintain the on-going business relationship with the CounterpartyG .
        52. ExposuresG identified as problems or potential problems should be closely monitored by management, and an Authorised FirmG should set out, for example, whether a loan grading system or a watch or problem list is used and, in the latter case, the criteria for adding an asset to or taking an asset off that list.
        53. It is recommended that Authorised FirmsG establish a dedicated unit to handle the recovery and work-out of problem loans and put in place policies for the referral of loans to this unit.
        54. An Authorised FirmG should have adequate procedures for recovering ExposuresG in arrears or those which had provisions made against them. These should allocate responsibility both internally and externally for its arrears management and recovery and define the involvement of the Authorised Firm'sG solicitors.
        55. Requirements relating to provisioning against loss on problem ExposuresG are covered in PIB chapter 4.

        Risk mitigation

        56. Various methods can be used to mitigate Credit RiskG , such as taking security or CollateralG , obtaining a guarantee from a third party, purchasing insurance or Credit DerivativesG . Authorised FirmsG should view these as complementary to, rather than a replacement for, thorough credit analysis and procedures.
        57. In controlling Credit RiskG , an Authorised FirmG may utilise certain mitigation techniques. Normally, they include:
        a. accepting CollateralG , standby letters of credit and guarantees;
        b. entering into NettingG arrangements,
        c. setting strict loan covenants; and
        d. using Credit DerivativesG and other hedging instruments.
        58. In determining which types of credit mitigation techniques should be used, firms should also consider:
        a. their own knowledge and experience in using such techniques;
        b. cost-effectiveness;
        c. type and financial strength of the CounterpartiesG or IssuersG ;
        d. correlation with the underlying credits;
        e. availability, liquidity and realisability of the credit mitigation instruments;
        f. the extent to which legally recognised documentation, e.g. ISDA Master Agreement, can be adopted; and
        g. the degree of supervisory recognition of the mitigation technique.
        59. While mitigation through CollateralG and guarantees is usually dealt with at the time of granting of credits, Credit DerivativesG and NettingG are often employed after the credit is in place, or used to manage the overall portfolio risk. When the mitigation arrangements are in place they should then be controlled. Authorised FirmsG should have written policies, procedures and controls for the use of credit mitigation techniques. They should also ensure adequate systems are in place to manage these activities.
        60. Authorised FirmsG should revalue their CollateralG and mitigation instruments on a regular basis. The method and frequency of revaluation depends on the nature of the hedge and the products involved.
        61. If an Authorised FirmG takes security or CollateralG , on credit facilities, appropriate policies and procedures should be documented covering:
        a. the types of security or CollateralG considered;
        b. procedures governing the valuation and revaluation of security or CollateralG including the basis of valuation;
        c. policies governing the taking of security or CollateralG , including obtaining appropriate legal title; and
        d. policies governing possession of security or CollateralG .
        62. The value of security and CollateralG should be monitored at an appropriate frequency. For example, commercial property might be revalued annually, whereas SecuritiesG provided as CollateralG should be marked to market usually on a daily basis. Residential property may not need to be revalued annually, but information should be sought as to general market conditions.
        63. When taking CollateralG in support of an ExposureG , an Authorised FirmG should ensure that legal procedures have been followed, to ensure the CollateralG can be enforced if required.
        64. An Authorised FirmG should consider the legal and financial ability of a guarantor to fulfil the guarantee if called upon to do so.
        65. An Authorised FirmG should analyse carefully the protection afforded by risk mitigants such as NettingG agreements or Credit DerivativesG , to ensure that any residual Credit RiskG is identified, measured, monitored and controlled.
        66. An Authorised FirmG providing mortgages at high loan-to-value ratios should consider the need for alternative forms of protection against the risks of such lending, including mortgage indemnity insurance, to protect against the risk of a fall in the value of the property.

        Record keeping

        67. The Authorised FirmG should maintain appropriate records of:
        a. credit ExposuresG , including aggregations of credit ExposuresG , by:
        i. GroupsG of Connected CounterpartiesG ; and
        ii. types of CounterpartyG as defined, for example, by the nature or geographical location of the CounterpartyG ;
        b. credit decisions, including details of the facts or circumstances upon which a decision was made; and
        c. information relevant to assessing current credit quality.
        68. Credit records should be retained for at least six years, subject to any requirement in the RulesG requiring such records to be kept for a longer period.
        69. It is important that sound and legally enforceable documentation is in place for each credit agreement as this may be called upon in the event of a default or dispute. An Authorised FirmG should therefore consider whether it is appropriate for an independent legal opinion to be sought on documentation used by the Authorised FirmG . Documentation should be in place before the Authorised FirmG enters into a contractual obligation or releases funds.

        Country and transfer risk ExposureG

        70. PIB chapter 4 does not provide limits on the size of an Authorised Firm'sG ExposureG to a particular country or region. However, an Authorised FirmG which has Large ExposuresG in a country or region should include in its Credit RiskG policy:
        a. the geographical areas in which the Authorised FirmG does or intends to do business;
        b. its definition of Credit RiskG ExposureG and transfer risks (such as exchange restrictions) associated with doing business in each country or region;
        c. how to measure its total ExposureG in each country or region and across several countries or regions;
        d. the types of business the Authorised FirmG intends to undertake in each country or region;
        e. limits on ExposuresG to an individual country or region which the Authorised FirmG deals with, and sub-limits for different types of business if appropriate;
        f. the procedure for setting and reviewing country or regional limits; and
        g. the process by which the Authorised Firm'sG actual country or regional ExposuresG will be monitored against limits and the procedure to be followed if the limits are breached.
        71. When setting country or regional limits, an Authorised FirmG should consider:
        a. the economic and political circumstances prevailing in the country or region;
        b. the transfer risks associated with any particular country or region;
        c. the type and maturity of business undertaken by the Authorised FirmG in a particular country or region;
        d. the Authorised Firm'sG existing concentration of country or regional risk;
        e. the source of funding for the country or regional ExposureG ; and
        f. sovereign or other guarantees offered.

        Provisioning

        72. Depending upon the nature of the Authorised FirmG and its business, the Authorised Firm'sG provisioning policy should set out:
        a. who has responsibility for reviewing the provisioning policy and approving any changes;
        b. how frequently the policy should be reviewed;
        c. when the review will take place, including the circumstances in which a review might be more frequent;
        d. who has primary responsibility for ensuring the provisioning policy remains appropriate, including any division of responsibilities;
        e. the areas of its business to which the provisioning policy relates — it should include both on balance sheet and off balance sheet ExposuresG and assets;
        f. where it takes different approaches to different lines of its business and the key features of those differences;
        g. who has responsibility for monitoring its asset portfolio on a regular basis in order to identify problem or potential problem assets and the factors it takes into account in identifying them;
        h. whether a loan grading system or a watch or problem list is used and, in the latter case, the criteria for adding an asset to or taking an asset off that list;
        i. the extent to which the value of any CollateralG , guarantees or insurance which the Authorised FirmG holds affects the need for or size of provision;
        j. on what basis the Authorised FirmG makes its provisions, including the extent to which the level of provisioning is left to managerial judgement or to a committee or involves specified formulae and the methodologies or debt management systems and other formulae used to determine provisioning levels for different business lines and the factors applied within these methodologies;
        k. who is responsible for ensuring that the Authorised Firm'sG provisioning policy is being implemented properly, and the measures the Authorised FirmG has in place if its provisioning polices are not adhered to;
        l. who is responsible for the regular reviews of the Authorised Firm'sG specific and general provisions and who decides whether provision levels are satisfactory. The reviews should take account of changes in the status of the ExposuresG and potential losses and changes in the conditions associated with them;
        m. the reports used to enable management to ensure that the Authorised Firm'sG provisioning levels remain satisfactory, the frequency and purpose of those reports and their circulation;
        n. the procedures for recovering ExposuresG in arrears or ExposuresG which have had provisions made against them, including who has responsibility both internally and externally for its arrears management and recovery and the involvement of the Authorised Firm'sG solicitors;
        o. the procedures and methodologies for writing off and writing back provisions, including treatment of interest and who has the relevant responsibility for determining these;
        p. the frequency of any review of its write off experience against provisions raised; such a review can help identify whether an Authorised Firm'sG policies result in over or under provisioning across the business cycle, and contribute to a general review of an Authorised Firm'sG provisioning policy and the design of any loan grading systems, Credit RiskG models, and risk pricing; and
        q. the Authorised Firm'sG procedures and methodologies for calculating and raising provisions for contingent and other liabilities, how frequently they should be reviewed and who has the relevant responsibilities. Other liabilities include the crystallisation of contingent liabilities such as acceptances, endorsements, guarantees, performance bonds, indemnities, irrevocable letters of credit and the confirmation of documentary credits.
        73. Provisions may be general (against the whole of a given portfolio) or specific (against particular ExposuresG identified as bad or doubtful), or both. The DFSAG expects contingent liabilities and anticipated losses to be recognised in accordance with the applicable accounting standards.
        74. Appropriate systems and controls for provisions vary with the nature, scale and complexity of the credit granted. An Authorised FirmG for which the extension of credit is a substantial part of its business is expected to have greater regard to developing, implementing and documenting a provisioning policy than an Authorised FirmG for which Credit RiskG is incidental to the operation of its business.
        75. The DFSAG recognises that the frequency with which an Authorised FirmG reviews its provisioning policy once it has been established will vary from firm to firm. However, the DFSAG expects an Authorised FirmG to review its policy to ensure it remains appropriate for the business it undertakes and the economic environment in which it operates. The provisioning policy should be reviewed at least annually by the Governing BodyG .
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.2 Credit Conversion Factors (CCFs) for Calculating Exposures

      • CCFs for Off-Balance Sheet CR Exposures

        • PIB A4.2.1

          The applicable CCFs for off-balance sheet CR ExposuresG are provided in the table below.

            Description of Off-balance Sheet Item CCF
          (a) Direct credit substitutes 100%
          (b) TransactionG -related contingent items 50%
          (c) Short-term self-liquidating trade-related contingent items (applicable to both issuing and confirming banks) and commitments to underwrite debt and equity SecuritiesG 20%
          (d) Note issuance facilities and revolving UnderwritingG facilities 50%
          (e) TransactionsG , other than SFTs, involving the posting of SecuritiesG held by the Authorised FirmG as CollateralG 100%
          (f) Asset sales with recourse, where the Credit RiskG remains with the Authorised FirmG 100%
          (g) Other commitments with certain drawdown 100%
          (h) Other commitments
          (i) with an Original MaturityG of more than one year
          (ii) with an Original MaturityG of one year or less
          (iii) which are unconditionally cancellable at any time by the Authorised FirmG without prior notice, or that effectively provide for automatic cancellation due to deterioration in an obligor's creditworthiness
          50%

          20%

          0%
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.2.1 Guidance

            1. In cases where there is an undertaking to provide a commitment on another off-balance sheet ExposureG , an Authorised FirmG should apply the lower of the applicable CCFs. Examples of direct credit substitutes include general guarantees of indebtedness, standby letters of credit serving as financial guarantees for loans and SecuritiesG , and acceptances (including endorsements with the character of acceptances). Examples of transaction-related contingent items include performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions.
            2. Documentary credits collateralised by the underlying shipments are an example of short-term self-liquidating trade-related contingent items. In respect of item (f) in the table above, the terms of the agreement should be such that there is no substantial transfer of all risks and rewards of ownership to the CounterpartyG . Other commitments with certain drawdown would include forward purchase, forward deposits and partly paid SecuritiesG . Formal standby facilities and credit lines are examples of other commitments, referred to in item (h) of the table above.
            3. In respect of item (h)(iii) in the table above, an Authorised FirmG , if required to by the DFSAG , should be able to demonstrate that it actively monitors the financial condition of the obligor, and that its internal control systems are such that it is able to cancel the facility upon evidence of a deterioration in the credit quality of the obligor.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • CCFs for Off-Balance Sheet SE Exposures

        • PIB A4.2.2

          (1) The applicable CCFs for off-balance sheet SE ExposuresG are provided in the table below.
            Description of off-balance sheet item CCF
          (a) Unrated eligible liquidity facilities 50%
          (b) Eligible ServicerG cash advance facilities 0%
          (c) Others 100%
          (2) An Authorised FirmG must notify the DFSAG if it intends to provide eligible ServicerG cash advance facilities and when there is a drawdown.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.2.2 Guidance

            Eligible ServicerG cash advance facilities refers to undrawn ServicerG cash advances or facilities that are contractually provided for and unconditionally cancellable without prior notice, so long as the ServicerG is entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying ExposuresG .

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

    • PIB A4.3 Collateral Calculations and Haircuts

      • "Core Market Participants"

        • PIB A4.3.1

          For the purposes of this section, "core market participant" means:

          (a) any central government or Central BankG ;
          (b) any PSE;
          (c) any qualifying MDB;
          (d) any banking institution or securities firm;
          (e) any financial institution eligible for a 20% risk weight under PIB section 4.12;
          (f) any central CounterpartyG ;
          (g) any regulated mutual fund that is subject to capital or leverage requirements; or
          (h) any regulated pension fund.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Calculation of E* for Collateralised Transactions Other than OTC Derivative Transactions and Long Settlement Transactions

        • PIB A4.3.2

          An Authorised FirmG using the FCCA to calculate E* must adjust both the amount of the ExposureG to the CounterpartyG and the value of any CollateralG received in support of that CounterpartyG to take into account possible future fluctuations in the value of either due to market movements, by using the methods and haircuts set out in Rules PIB A4.3.6 to PIB A4.3.29.

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

        • PIB A4.3.3

          An Authorised FirmG must calculate the appropriate haircuts to be applied using one of the following methods:

          (a) standard supervisory haircuts; or
          (b) own-estimate haircuts.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.4

          [Not currently in use]

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

        • PIB A4.3.5

          (1) As an alternative to the use of standard supervisory haircuts or own-estimate haircuts, an Authorised FirmG may, subject to DFSAG approval, use VaR models to reflect the price volatility of the ExposureG and CollateralG for SFTs which are covered by a qualifying bilateral NettingG agreement. The requirements relating to the use of this approach are set out in PIB section A4.5.
          (2) An Authorised FirmG may seek the DFSA'sG approval referred to in (1) only if it has already received the DFSA'sG approval to use the internal models approach for calculating the Market Risk Capital RequirementG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.3.5 Guidance

            Approval for the use of the internal model approach is governed by PIB section 5.11 of PIB chapter 5 (Market RiskG ).

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

        • PIB A4.3.6

          An Authorised FirmG using standard supervisory haircuts or own-estimate haircuts under the FCCA must calculate E* for any collateralised transaction not covered by a qualifying bilateral NettingG agreement or a qualifying cross-product NettingG agreement other than OTC DerivativeG transactions or long settlement transactions, using the following formula:

          E* = max {0, [E (or EAD)(1 + HE) – C(1 – HC – HFX)]}

          where;

          E* = ExposureG value after risk mitigation;

          E = fair value of the ExposureG calculated in accordance with PIB section 4.9;

          HE = haircut appropriate to the ExposureG ;

          C = fair value of the eligible financial CollateralG received;

          HC = haircut appropriate to the CollateralG , or if the CollateralG is a basket of assets, the weighted sum of the haircuts appropriate to the assets in the basket where each weight is the proportion of the asset in the basket in units of currency; and

          HFX = haircut appropriate for currency mismatch between the CollateralG and ExposureG .

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

          • PIB A4.3.6 Guidance

            Where the residual maturity of the CollateralG is shorter than the residual maturity of the ExposureG , the Authorised FirmG must substitute PA calculated in accordance with Rules PIB 4.13.14 to PIB 4.13.16 for C(1 − HC − HFX).

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

        • PIB A4.3.7

          An Authorised FirmG using standard supervisory haircuts or own-estimate haircuts under the FCCA must calculate E* for any collateralised transaction covered by a qualifying bilateral NettingG agreement or qualifying cross-product NettingG agreement other than OTC DerivativeG transactions or long settlement transactions, using the following formula:

          E* = Max {0, [ Σ (E ) − Σ (C) + add-on]}

          where:

          E* = ExposureG value after risk mitigation;

          E = fair value of the ExposureG calculated in accordance with PIB section 4.9;

          C = fair value of eligible financial CollateralG received; and

          Add-on = the add-on amount to reflect the market price volatility and foreign exchange volatility, calculated in accordance with PIB Rule A4.3.8 below.

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

        • PIB A4.3.8

          An Authorised FirmG must calculate the add-on using one of the following approaches:

          (a) the approach according to the following formula:
          add on = Σ ((ES )(HS )) + Σ ((EFX )(HFX ))
          where:

          ES = absolute value of the net position in a given SecurityG ;

          HS = haircut appropriate to ES

          EFX = absolute value of the net position in a currency different from the settlement currency; and

          HFX = haircut appropriate for currency mismatch between the CollateralG and ExposureG ;

          or
          (b) the approach using VaR models, provided the Authorised FirmG has received approval from the DFSAG as referred to in PIB Rule A4.3.5.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.9

          Subject to Rules PIB A4.3.10 to PIB A4.3.12, an Authorised FirmG must determine HE, HC, HS and HFX referred to in Rules PIB A4.3.6 to PIB A4.3.8, in accordance with the standard supervisory haircuts in the table forming part of PIB Rule A4.3.13.

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

        • PIB A4.3.10

          An Authorised FirmG may calculate HE, HC, HS and HFX using own-estimate haircuts in accordance with Rules PIB A4.3.17 to PIB A4.3.23 if it has received approval from the DFSAG to use the internal models approach for calculating the Market Risk Capital RequirementG . If the Authorised FirmG chooses to use own-estimate haircuts, it must do so consistently for determining haircuts for all eligible financial CollateralG and all portfolios, except that it may, with the approval of the DFSAG , use the standard supervisory haircuts in Rules PIB A4.3.13 to PIB A4.3.16 for any portfolio which is immaterial in size and risk profile.

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

        • PIB A4.3.11

          An Authorised FirmG may apply a value of zero to HE, HC and HS in the case of a qualifying SFT with a core market participant. This approach is not available to an Authorised FirmG using VaR models in accordance with PIB section A4.5 to calculate E*.

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

        • PIB A4.3.12

          An Authorised FirmG may apply a value of zero to HE, HC and HS in the case of an SFT where both the ExposureG and CollateralG are SecuritiesG issued by central governments where a value of zero has been prescribed by the banking regulator of that jurisdiction and ExposuresG to the central government of that jurisdiction have a Credit Quality GradeG of 1 as set out in the table in PIB Rule 4.12.4.

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

      • Standard Supervisory Haircuts

        • PIB A4.3.13

          The standard supervisory haircuts, HE, HC and HS referred in Rules PIB A4.3.6 to PIB A4.3.8 (assuming daily remargining or revaluation and a ten-business day holding period), are subject to PIB Rule A4.3.14, as follows:

          Eligible Financial CollateralG Standard Supervisory Haircuts
          Issue Rating for Debt SecuritiesG Residual MaturityG Central Governments or Central BanksG Other IssuersG
          Any debt security with a Credit Quality GradeG of 1 or short-term Credit Quality GradeG of "I". ≤ 1 year 0.005 0.01
          > 1 year, ≤ 5 years 0.02 0.04
          > 5 years 0.04 0.08
          Any debt security with a Credit Quality GradeG of 2 or 3 or short-term Credit Quality GradeG of "II" and "III" and unrated bank securities as defined in PIB Rule 4.13.5(d). ≤ 1 year 0.01 0.02
          > 1 year, ≤ 5 years 0.03 0.06
          > 5 years 0.06 0.12
          Any debt security with a Credit Quality GradeG of 4. All 0.15 NA
          Gold 0.15
          Any equity (including a convertible bond) included in a main index. 0.15
          Any other equity (including a convertible bond) traded on a regulated exchange. 0.25
          Any UnitG in a Collective Investment FundG . highest haircut applicable to any SecurityG in which the fund can invest
          Cash in the same currency as the underlying ExposureG . 0
          InstrumentsG in the Trading BookG other than those listed (for pre-settlement CounterpartyG ExposuresG arising from SFTs included in the Trading BookG ). 0.25
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.3.13 Guidance

            PSEs and MDBs should be treated as equivalent to central governments for the purpose of this table.

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

        • PIB A4.3.14

          The standard supervisory haircut, HE, for transactions in which an Authorised FirmG lends instruments that do not qualify as eligible financial CollateralG (e.g. corporate debt SecuritiesG with a Credit Quality GradeG of 4 or worse) is 0.25.

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

        • PIB A4.3.15

          The standard supervisory haircut, HFX, for currency mismatch where ExposureG and CollateralG are denominated in different currencies based on a ten-business day holding period and daily revaluation is 0.08.

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

        • PIB A4.3.16

          Where the minimum holding period, frequency of remargining or revaluation assumptions set out for eligible financial CollateralG in PIB Rule A4.3.13 differ from those of the Authorised FirmG , the Authorised FirmG must adjust HE, HC and HS using the formulae in Rules PIB A4.3.25 to PIB A4.3.26.

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

      • Own-Estimate Haircuts

        • PIB A4.3.17

          (1) An Authorised FirmG must apply for approval from the DFSAG if it intends to use own-estimate haircuts.
          (2) An Authorised FirmG must not use own-estimate haircuts unless it has received approval to adopt the internal models approach to calculate the Market Risk Capital RequirementG .
          (3) The DFSAG may grant approval for an Authorised FirmG to use own-estimate haircuts subject to such conditions or restrictions as the DFSAG may impose.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.18

          If An Authorised FirmG becomes aware after it has received approval to use own-estimate haircuts that it no longer complies with any of the requirements in Rules PIB A4.3.17 to PIB A4.3.23 or any of the conditions or restrictions imposed by the DFSAG pursuant to PIB Rule A4.3.17 or no longer meets the RulesG , it must

          (a) inform the DFSAG as soon as practicable;
          (b) assess the effect of the situation in terms of the risk posed to the Authorised FirmG ;
          (c) prepare a plan to rectify the situation and inform the DFSAG of its plan as soon as practicable; and
          (d) undertake prompt corrective action within a reasonable time in accordance with the plan prepared pursuant to (c).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.19

          If An Authorised FirmG fails to comply with PIB Rule A4.3.18, the DFSAG may revoke its approval for the Authorised FirmG to use own-estimate haircuts. The Authorised FirmG may also be required to revise its estimates for the purpose of calculating regulatory Capital RequirementsG if its estimates of E*, does not adequately reflect its ExposureG to CounterpartyG Credit RiskG .

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

      • Requirements for Use of Own-Estimate Haircuts

        • PIB A4.3.20

          An Authorised FirmG using own-estimate haircuts must estimate the volatility for each individual instrument that is taken as eligible financial CollateralG . In estimating such volatility, the Authorised FirmG must not take into account the correlations between unsecured ExposuresG , CollateralG and exchange rates. Where there are maturity mismatches, the Authorised FirmG must apply Rules PIB 4.13.14 to PIB 4.13.16.

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

        • PIB A4.3.21

          An Authorised FirmG must ensure that the model used to estimate volatilities captures all the material risks run by it.

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

        • PIB A4.3.22

          In calculating the haircuts using internal estimates of volatilities, an Authorised FirmG must:

          (a) use a 99th percentile, one-tailed confidence interval;
          (b) use the minimum holding period and remargining or revaluation conditions according to the type of transaction as set out in Rules PIB A4.3.24 to PIB A4.3.26. Where the minimum holding period, remargining or revaluation conditions used by an Authorised FirmG differ from those set out above, it must adjust the haircuts using the formulae in Rules PIB A4.3.25 to PIB A4.3.26;
          (c) use a historical observation period (i.e. sample period) of at least one year. Where the Authorised FirmG uses a weighting scheme or other methods for the historical observation period, the "effective" observation period must be at least one year (i.e. the weighted average time lag of the individual observations must not be less than six months);
          (d) update its data sets at least once every three months and recalculate haircuts at least once every three months. The DFSAG may require more frequent updates whenever there is an increase in volatility in market prices of the CollateralG ; and
          (e) use the estimated volatility data in the day-to-day risk management process of the Authorised FirmG and if the Authorised FirmG is using a longer holding period for risk management compared to the ones prescribed in Rules PIB A4.3.24 to PIB A4.3.26., then the longer holding period must also be applied for the calculation of haircuts.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.3.22 Guidance

            1. An Authorised FirmG should:
            a. take into account the illiquidity of lower quality CollateralG and should adjust the holding period upwards in cases where such a holding period would be inappropriate given the liquidity of the CollateralG ; and
            b. identify where historical data may understate potential volatility (e.g. a pegged currency); and deal with such cases by subjecting the data to stress testing.
            2. An Authorised FirmG , when considering the market liquidity of a CollateralG , should consider four dimensions:
            a. immediacy, which refers to the speed with which a trade of a given size at a given cost is completed;
            b. depth, which refers to the maximum size of a trade for any given bid-ask spread;
            c. tightness, which refers to the difference between buy and sell prices; and
            d. resiliency, which refers to how quickly prices revert to original or fundamental levels after a large transaction.
            3. The Authorised FirmG should have experienced persons familiar with the relevant market for the CollateralG to judge the market liquidity of the CollateralG and determine if the minimum holding period is sufficient for any given CollateralG . The holding period should be deemed to be insufficient if the value of the CollateralG would move by more than 1% should the CollateralG be liquidated within the minimum holding period in these RulesG , taking into account the immediacy, depth, tightness and resiliency of the market. In such a situation, the holding period should be adjusted upwards, such that the CollateralG can be safely liquidated within the period, without causing a price movement of more than 1% relative to the value after the haircut.
            4. An Authorised FirmG should aim to update its data sets daily in line with industry practice. If the Authorised FirmG updates its data sets less than once every three months, it should be able to demonstrate to the DFSAG that the volatilities of the market prices are stable. In addition, where the updating of data sets is less frequent, the DFSAG will normally expect compensating controls in the form of stress testing.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.23

          An Authorised FirmG must have robust and effective processes in place for ensuring compliance with documented internal policies, controls and procedures concerning the operation of the risk measurement system to support the use of own-estimate haircuts.

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

          • PIB A4.3.23 Guidance

            In order to demonstrate compliance with PIB Rule A4.3.23, an Authorised FirmG should give due regard to the following expectations of the DFSAG :

            (a) the risk measurement system should be used in conjunction with internal ExposureG limits;
            (b) the risk management processes of an Authorised FirmG relating to the use of own-estimate haircuts should be subject to internal audit at least once a year, covering the following areas:
            (i) the integration of risk measures into daily risk management;
            (ii) the validation of any significant change in the risk management process;
            (iii) the accuracy and completeness of position data;
            (iv) the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources; and
            (v) the accuracy and appropriateness of volatility assumptions.
            (c) such internal audits referred to in (b) are not to be confused with an internal validation of the risk management systems surrounding the use of own-estimate haircuts. All significant risk models employed to support the use of own-estimate haircuts should be validated at least once a year. The internal audits serve as an independent process check to help ensure that the validation is sufficiently robust and effective.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Minimum Holding Periods, Remargining or Revaluation Conditions

        • PIB A4.3.24

          The following table sets out the minimum holding periods and remargining or revaluation conditions for different types of transactions where an Authorised FirmG uses own-estimate haircuts:

          Minimum holding periods and remargining/revaluation conditions

          TransactionG type Minimum holding period Remargining/ Revaluation Condition
          Repos, reverse repos, SecuritiesG or commodities lending or SecuritiesG or commodities borrowing transactions 5 business days daily remargining
          OTC DerivativeG transactions and margin lending transactions 10 business days daily remargining
          ExposuresG secured by eligible financial CollateralG 20 business days daily revaluation
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.25

          Where the assumed minimum holding period is not met or remargining or revaluation conditions are not fulfilled, an Authorised FirmG must calculate the applicable haircut using the following formula:

          H = HM √{[NR + (TM − 1)]/ TM}

          where —

          "H" refers to the haircut;

          "HM" refers to the haircut under the minimum holding period;

          "TM" refers to the minimum holding period for the type of transaction or eligible financial CollateralG ; and

          "NR" refers to the actual number of business days between remargining or revaluation, as the case may be.

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

        • PIB A4.3.26

          When an Authorised FirmG uses a holding period, TN, which is different from the specified minimum holding period, TM, the Authorised FirmG must calculate HM using the following formula:

          HM = HN√(TM/TN)

          where —

          "TN" refers to the holding period used by the Authorised FirmG for deriving HN; and

          "HN" refers to the haircut based on the holding period TN.

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

      • Recognition of Eligible Financial Collateral under FCSA

        • PIB A4.3.27

          Subject to PIB A4.3.28, an Authorised FirmG which has taken eligible financial CollateralG for a CR ExposureG and is using the FCSA may recognise the effects of Credit RiskG mitigation of the eligible financial CollateralG as follows:

          (a) break down the ExposureG into —
          (i) a collateralised portion with E equal to the latest fair value of the eligible financial CollateralG ; and
          (ii) an uncollateralised portion with E equal to the E of the CR ExposureG less the latest fair value of the eligible financial CollateralG ;
          and
          (b) for the purposes of calculating the Credit RWAG amount pursuant to PIB Rule 4.8.3, use:
          (i) for the collateralised portion, the CRW that is applicable to the eligible financial CollateralG as though the Authorised FirmG had a direct ExposureG to that CollateralG ; and
          (ii) for the uncollateralised portion, the CRW that is applicable to the obligor.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.28

          If the CRW determined in accordance with A4.3.27(b)(i) is less than 20%, an Authorised FirmG must apply a CRW of 20% to the collateralised portion of the CR ExposureG , except in the following cases:

          (a) a qualifying SFT where the CounterpartyG in the transaction is a core market participant, in which case the Authorised FirmG may apply a risk weight of 0%;
          (b) a qualifying SFT where the CounterpartyG in the transaction is not a core market participant, in which case the Authorised FirmG may apply a risk weight of 10%;
          (c) an OTC DerivativeG transaction subject to daily mark-to-market that is collateralised by cash, and where there is no currency mismatch, in which case the Authorised FirmG may apply a risk weight of 0%;
          (d) an OTC DerivativeG transaction subject to daily mark-to-market that is collateralised by ExposuresG to central governments, Central BanksG or PSE or a combination thereof qualifying for a 0% risk weight in accordance with the RulesG in PIB chapter 4, and where there is no currency mismatch, in which case the Authorised FirmG may apply a risk weight of 10%; and
          (e) a transaction where there is no currency mismatch and the CollateralG comprises —
          (i) cash on deposit as set out in PIB Rule 4.13.5(a); or
          (ii) ExposuresG in the central government and Central BankG asset class or in the PSE asset class or a combination thereof qualifying for a 0% risk weight under the Rules in PIB section 4.12, and the latest fair value of such CollateralG has been discounted by 20% for the purposes of determining the value of the collateralised portion of the CR ExposureG in accordance with PIB Rule A4.3.27(a)(i),
          in which case the Authorised FirmG may apply a CRW of 0%.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.3.29

          An Authorised FirmG which is using FCSA must not recognise the effects of Credit RiskG mitigation of any CollateralG with a maturity mismatch.

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

    • PIB A4.4 Qualifying Securities Financing Transactions (SFTs)

      • PIB A4.4.1

        A qualifying SFT must comply with the following requirements:

        (a) both the ExposureG and the CollateralG are cash, or a SecurityG issued by a central government or Central BankG qualifying for a 0% risk weight under the RulesG in PIB section 4.12;
        (b) both the ExposureG and the CollateralG are denominated in the same currency;
        (c) either the transaction is overnight or both the ExposureG and the CollateralG are marked-to-market daily and are subject to daily remargining;
        (d) following a Counterparty'sG failure to remargin, the time that is required between the last mark-to-market before the failure to remargin and the liquidation of the CollateralG is considered to be no more than four business days;
        (e) the transaction is settled across a recognised settlement system for that type of transaction;
        (f) the documentation covering the agreement is standard market documentation for repos, reverse repos, SecuritiesG , lending transactions or SecuritiesG borrowing transactions in the SecuritiesG concerned;
        (g) the transaction is governed by documentation specifying that if the CounterpartyG fails to satisfy an obligation to deliver cash or SecuritiesG or to deliver margin, or otherwise defaults, then the transaction may be terminated immediately; and
        (h) upon any event of default, regardless of whether the CounterpartyG is insolvent or bankrupt, the Authorised FirmG has the unfettered, legally enforceable right to immediately seize and liquidate the CollateralG for the benefit of the Authorised FirmG .
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A4.5 Requirements for Use of VaR Models

      • PIB A4.5.1

        An Authorised FirmG using VaR models must:

        (a) use a minimum holding period of ten business days except in the case of an SFT, for which it must use a minimum holding period of five business days;
        (b) backtest its output by:
        (i) identifying a sample of 20 CounterpartiesG , on an annual basis, which must include the ten largest CounterpartiesG as determined by the Authorised FirmG according to its own ExposureG measurement approach and ten others selected at random;
        (ii) comparing, for each day and for the sample of 20 CounterpartiesG , the VaR estimate of the previous day for the CounterpartyG portfolio to the difference between the net value of the previous day's portfolio using today's market prices and the net value of that portfolio using the previous day's market prices; and
        (iii) counting it as an exception, where this difference exceeds the previous day's VaR estimate.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.5.1 Guidance

          An Authorised FirmG should adjust the minimum holding period upwards for any Financial InstrumentG where the specified holding period would be inappropriate given the liquidity of the instrument concerned. When the outcome of the model consistently results in a large number of exceptions, either overall or for one significant CounterpartyG , the Authorised FirmG is expected to review the model assumptions and make modifications as appropriate.

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

    • PIB A4.6 Credit RWA — Unsettled Transactions, free deliveries and OTC Derivatives

      • PIB A4.6 Guidance

        1. Where settlement does not occur on the due date and neither party has released the relevant cash or SecuritiesG , an Authorised FirmG faces Market RiskG , namely the differential between the contract price of the SecuritiesG and their current value in the market. In this case an Authorised FirmG also faces a Credit RiskG ExposureG for the Unsettled TransactionG , for which the Authorised FirmG is required to hold regulatory capital. The relevant Credit RiskG ExposureG should be included in the calculation of Credit RWAG for the Authorised FirmG .
        2. An Authorised FirmG is at risk for the whole amount of the contract (as well as any further movement in price) if it has delivered its leg of a contract before receipt of the other leg. In this case an Authorised FirmG must calculate the Credit RiskG RWAG for the free delivery transaction.
        3. For OTC DerivativesG and other contracts, an Authorised FirmG is exposed to settlement risk. For an OTC DerivativeG contract, the risk is that the price moves in an Authorised Firm'sG favour so that it makes a book profit but at maturity the Authorised FirmG cannot realise that profit because the other party defaults. The amount at risk is therefore less than the Authorised FirmG 's nominal ExposureG and is measured by calculating the proportion of the nominal ExposureG considered to be at risk -the Credit Equivalent AmountG .
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.6.1

        The section applies in respect of items in both the Trading BookG and Non-Trading BookG .

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

      • PIB A4.6.2

        CRWs must be calculated on the CounterpartyG to the transaction, not on the IssuerG of the SecurityG .

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

      • PIB A4.6.3

        When calculating its Credit RWAG , an Authorised FirmG must not include RWAG arising from a transaction if it is a negative amount.

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

      • PIB A4.6.4

        CRW is applied in accordance with PIB section A4.3 except that the maximum CPW for an OTC DerivativeG is 50%.

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

      • Unsettled Transactions

        • PIB A4.6.5

          An Authorised FirmG must calculate the Credit RWAG for transactions in which debt instruments, equities, foreign currencies and commodities (excluding repos, reverse repos and SecuritiesG or commodities lending/borrowing) remain unsettled after their due delivery dates, using the following formula:

          Credit RWAG on Unsettled TransactionsG = E x the appropriate percentage from the second column in the table below:

          Number of business days after due settlement date Percentages used for calculation of Credit RWAG on Unsettled TransactionsG
          0–4 0%
          5–15 100%
          16–30 500%
          31–45 750%
          46 or more 1000%
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.6

          If assets involved in the transaction are to be received by the Authorised FirmG and the transaction remains unsettled: E = MV-CV.

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

        • PIB A4.6.7

          If assets involved in the transaction are to be delivered by the Authorised FirmG and the transaction remains unsettled: E = CV-MV. If the values for E calculated above are negative, E = 0.

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

        • PIB A4.6.8

          An Authorised FirmG must determine E for an unsettled non-DvP transaction as equal to the outstanding receivables after the end of the first contractual payment or delivery date.

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

          • PIB A4.6.8 Guidance

            1. E is the price difference to which the Authorised FirmG is exposed, being the difference between the agreed settlement price for the debt instrument, equity, foreign currency or commodity in question and its current market value, where the difference could involve a loss for the firm.
            2. In cases of a system-wide failure of a settlement or clearing system, an Authorised FirmG need not calculate CRCOMG on transactions remaining unsettled till the settlement or clearing system is brought back to normal operations.
            3. In respect of unsettled non-DvP transactions referred to in PIB Rule A4.6.8, if the dates when two payment legs are made are the same according to the time zones where each payment is made, they are deemed to have been settled on the same day.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Free Delivery Transactions

        • PIB A4.6.9

          The CRW for transactions in which an Authorised FirmG has:

          (a) delivered SecuritiesG or commodities before receiving payment;
          (b) paid for SecuritiesG or commodities before receiving the items purchased; or
          (c) entered into a foreign exchange contract undertaken in the spot market or contracted for forward settlement and has released funds to its CounterpartyG but has not yet received the funds in the other currency;

          is calculated by the formula:

          Credit RWAG on free deliveries = E x CRW x the multiplier from the table below:

          Number of business days since delivery multiplier used for calculation of Credit RWAG on free deliveries
          0–15 1
          16–30 5
          31–45 7.5
          46 or more 10
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A.4.6.10

          If an Authorised FirmG has delivered commodities or SecuritiesG to a CounterpartyG and has not received payment: E = CV due to the Authorised FirmG .

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

        • PIB A4.6.11

          If an Authorised FirmG has made payment to a CounterpartyG for commodities or SecuritiesG and has not received them: E = MV of the commodities or SecuritiesG .

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

        • PIB A4.6.12

          If the settlement of the transaction is to be effected across a national border, Credit RWAG needs to be calculated only when more than one business day has elapsed since the firm has made the relevant payment or delivery.

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

        • PIB A4.6.13

          In the case of a Non-Trading BookG item, an Authorised FirmG must treat an ExposureG in accordance with the relevant provisions of PIB chapter 4.

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

      • Financial Derivatives

        • PIB A4.6.14

          For the purposes of calculating Credit RWAG , a financial DerivativeG includes, but is not limited to OTC DerivativesG and Credit DerivativesG . ExposuresG dealt with under this section do not include ExposuresG to CCPs which qualify for a zero ExposureG value.

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

        • PIB A4.6.15

          For OTC DerivativeG transactions: Credit RWAG = CEAG x CRW.

          where:

          (a) contracts traded on exchanges, where they are subject to daily margining requirements, are excluded; and
          (b) CEAG is calculated using the formula:
          CEAG = the replacement cost of the OTC DerivativeG contract (obtained by marking to market) (in the case of a transaction with negative replacement cost, a value of zero) + PFCE.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.6.15 Guidance

            Details of how to net the PFCE are given in PIB Rule A4.6.22.

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

        • PIB A4.6.16

          (1) In case of Credit DerivativesG including but not limited to total return swaps and credit default swaps, an Authorised FirmG must determine its PFCE by multiplying the nominal amount of the instrument by the following percentages:
          (a) 5% where the reference obligation of the Credit DerivativeG is one that if it gave rise to a direct ExposureG of the Authorised FirmG would be a qualifying reference obligation; or
          (b) 10% where the reference obligation is one that if it gave rise to a direct ExposureG of the Authorised FirmG would not be a qualifying reference obligation.
          (2) For the purposes of this RuleG , a "qualifying reference obligation" means any SecurityG that is issued by any MDB, any SecurityG (including one issued by a PSE) that has a Credit Quality GradeG of 3 or better as set out in PIB section 4.12 based on the external credit assessment of at least one recognised external credit rating agency, and any unrated SecurityG issued by a PSE which belongs to a country with a Credit Quality GradeG of 1 as set out in PIB section 4.12.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.17

          In the case of credit default swaps, an Authorised FirmG which is a seller of credit protection may assign a PFCE of 0%, unless the protection is subject to close-out on the insolvency of the buyer.

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

        • PIB A4.6.18

          In cases where a Credit DerivativeG provides protection in relation to "nth to default" amongst a number of underlying obligations, an Authorised FirmG must apply a percentage in accordance with PIB Rule A4.6.16G applicable to the obligation with the nth lowest credit quality determined by whether it is one that if incurred by the Authorised FirmG would be a qualifying reference obligation for the purposes of PIB Rule A4.6.16(1)(a).

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

          • PIB A4.6.18 Guidance

            Where the Credit DerivativeG is a first to default transaction, the appropriate percentage for the PFCE will be determined by the lowest credit quality of the underlying obligations in the basket. If there are nonqualifying items in the basket, the percentage applicable to the non-qualifying reference obligations should be used. For second and any subsequent default transactions, underlying assets should continue to be allocated according to credit quality: i.e. for a second to default transaction, the applicable percentage figure is the percentage applicable to the second lowest credit quality.

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

        • PIB A4.6.19

          For OTC DerivativeG transactions other than Credit DerivativesG , PFCE is calculated by multiplying the NP of the contract by the appropriate percentage from the table below.

          Type of contract Residual maturity of contract
          <1 Year 1–5 Years >5 Years
          Single currency interest rate basis swaps 0.0% 0.0% 0.0%
          Interest rate Single currency interest rate swaps other than basis swaps
          Multiple currency basis swaps
          Forward-rate agreements
          Interest rate futures
          Interest rate OptionsG purchased
          DerivativesG referenced on an Investment GradeG debt Item
          Other contracts of a similar nature to those in this box.
          0.0% 0.5% 1.5%
          Foreign exchange (including gold) except as referred to in A4.6.20 Cross-currency interest-rate swaps.

          Forward foreign exchange contracts.

          Currency futures.

          Currency OptionsG purchased.

          Other contracts of a similar nature to those in this box, including gold.
          1.0% 5.0% 7.5%
          Equities Cash settled forward contracts

          Contracts of a nature similar to those in the interest rate and foreign exchange boxes.

          DerivativesG referenced on a bond which is not an Investment GradeG debt Item.
          6.0% 8.0% 10.0%
          Precious metals (except gold) Contracts of a nature similar to those in the interest rate and foreign exchange boxes concerning precious metals, except gold. 7.0% 7.0% 8.0%
          Commodities (except precious metals) and any other contracts Contracts of a nature similar to those in the interest rate or foreign exchange boxes concerning commodities other than precious metals. 10.0% 12.0% 15.0%
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.20

          If the contract is an OTC foreign exchange contract (not including gold) with an Original MaturityG of 14 days or less: CEAG = 0.

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

        • PIB A4.6.21

          Where a contract price is based upon more than one underlying instrument, the higher of the relevant PFCE multipliers must be used.

          NettingG of PFCE

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

          • PIB A4.6.21 Guidance

            An Authorised FirmG may calculate the PFCE arising under OTC derivative contracts on a net basis.

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

        • PIB A4.6.22

          Where the conditions in in PIB section 4.13 are met, an Authorised FirmG may calculate its net PFCE on OTC derivative contracts using the following formula:

          PFCE reduced = 0.4 x PFCE gross + 0.6 x NGR x PFCE gross

          where:

          (a) "PFCE reduced" is the reduced figure for PFCE for all contracts with a given CounterpartyG included in the NettingG agreement;
          (b) "PFCE gross" is the sum of the figures for PFCE for all contracts with a given CounterpartyG which are included in the NettingG agreement; and
          (c) "NGR" is the net-to-gross ratio, being the quotient of the net replacement cost for all contracts included in the NettingG agreement with a given CounterpartyG (numerator) and the gross replacement cost for all contracts included in the NettingG agreement with that CounterpartyG (denominator).
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.6.23

          For the purposes of PIB Rule A4.6.19, the applicable maturity date must be the maturity of the longest date.

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

    • PIB A4.7 Credit RWA — Repurchase Agreements, Reverse Repurchase Agreements, Similar Transactions and Other Deferred Settlements

      • PIB A4.7.1

        This section applies to transactions in the Trading BookG in relation to repurchase agreements, reverse repurchase agreements, similar transactions and deferred settlements.

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

      • PIB A4.7.2

        For repurchase agreements and reverse repurchase agreements the formula for Credit RWAG , which must be calculated from T, is as follows: Credit RWAG = E x CRW.

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

      • PIB A4.7.3

        For repurchase agreements: E = MV of the SecuritiesG sold − value of the CollateralG or cash received.

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

      • PIB A4.7.4

        For reverse repurchase agreements: E = Amount paid or CollateralG given − MV of the SecuritiesG received.

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

      • PIB A4.7.5

        If the E calculated is negative: Credit RWAG = 0.

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

      • PIB A4.7.6

        The MV of SecuritiesG and the value of cash lodged must include accrued interest.

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

      • PIB A4.7.7

        The MV of SecuritiesG and the value of CollateralG under PIB A4.7.3 to PIB A4.7.6 should be calculated in accordance with the Credit RiskG mitigation provisions set out in PIB section 4.13.

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

      • PIB A4.7.8

        For deferred settlement purchases and sales transactions over the spot period: Credit RWAG = 0.

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

      • PIB A4.7.9

        The 'spot period' means the shortest time between T and:

        (a) the contractual settlement date;
        (b) the normal local market settlement date; and
        (c) T + five business days.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.7.10

        For deferred settlement purchases and sales transactions with a contractual settlement date after the spot period as set out above but less than T + five business days:

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

      • PIB A4.7.11

        Credit RWAG for deferred settlement transactions = E x CRW

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

      • PIB A4.7.12

        For deferred settlement purchases and sales transactions with a contractual settlement date exceeding T + five business days: Credit RWAG for deferred settlement transactions = E x CRW x the appropriate multiplier from the table below:

        Number of business days calculated from T Percentages used for calculation of CRCOMG on deferred settlement transactions
        6–30 5
        31–45 7.5
        46 or more 10
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.7.12 Guidance

          Credit RWAG for deferred settlement transactions applies even if the deferred settlement contract is not overdue.

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

    • PIB A4.8 Credit RWA — Other Trading Book Transactions

      • PIB A4.8.1

        For CounterpartyG ExposuresG in the Trading BookG not covered by sections PIB A4.6 and PIB A4.7, the following formula applies: Credit RWAG = E x CRW.

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

        • PIB A4.8.1 Guidance

          Examples include CounterpartyG ExposuresG in relation to exchange-traded DerivativesG , unpaid margin requirements, Trading BookG qualifying deposits, and fees and interest.

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

      • PIB A4.8.2

        Where a CounterpartyG has not fully paid a margin requirement on a DerivativeG transaction listed on an exchange or cleared through a clearing house: E = the shortfall.

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

      • PIB A4.8.3

        Where an Authorised FirmG sells or writes an OptionG to a CounterpartyG or buys an OptionG on behalf of a CounterpartyG and the CounterpartyG has not paid the full OptionG premium: E = the uncovered premium on the transaction.

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

      • PIB A4.8.4

        Where a CounterpartyG has not fully met amounts owed to an Authorised FirmG arising out of losses on closed-out DerivativeG transactions or has not fully settled amounts owed in respect of periodic or final settlement of transactions: E = the unpaid loss.

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

    • PIB A4.9 Exposures to Central Counterparties (CCPs)

      • PIB A4.9.1

        An Authorised FirmG may determine the ExposureG value of a Credit RiskG ExposureG outstanding with a CCP in accordance with PIB A4.9.2, provided that the CCP's CounterpartyG Credit RiskG ExposureG with all participants in its arrangements are fully collateralised on a daily basis.

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

      • PIB A4.9.2

        An Authorised FirmG may attribute an ExposureG value of zero, for purposes of calculating the CRCOMG to DerivativeG contracts and deferred settlement transactions, or to other ExposuresG arising in respect of those contracts or transactions (excluding an ExposureG arising from CollateralG held with CCPs as part of its default fund) where such ExposuresG are outstanding with a CCP and have not been rejected by the CCP.

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

      • PIB A4.9.3

        An Authorised FirmG which purchases Credit DerivativeG protection against a Non-Trading BookG ExposureG or against a CounterpartyG Credit RiskG ExposureG , must compute Market Risk Capital RequirementsG for the hedged asset in accordance with the relevant RulesG in PIB chapter 5.

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

      • PIB A4.9.4

        An Authorised FirmG must assign an ExposureG value of zero for purposes of determination of CRCOMG , for credit default swaps sold by it, where such credit default swaps are treated as credit protection provided by the Authorised FirmG and subject to a Capital RequirementG for Credit RiskG for the full amount.

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

      • Credit Default Products

        • PIB A4.9.5

          (1) The Protection BuyerG relies on the Protection SellerG to pay the Credit Event PaymentG if a Credit EventG occurs, and therefore must compute Credit RWAsG for the Counterparty RiskG involved.
          (2) The Protection SellerG is exposed to the Protection BuyerG only if there are premium or interest rate-related payments outstanding.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.9.6

          In the case of Total Return SwapsG , since each party relies on the other for payment, each party must compute Credit RWAsG .

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

        • PIB A4.9.7

          No Credit RWAG applies to credit-linked notesG unless a coupon or interest payment is outstanding.

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

    • PIB A4.10 Securitisation

      • PIB A4.10.1

        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 following conditions have been complied with:

        (a) except as provided in (g), (i) and (k), significant Credit RiskG associated with the securitised ExposuresG has been transferred from the OriginatorG to third parties;
        (b) the Authorised FirmG does not maintain effective or indirect control over the underlying ExposuresG ;
        (c) the assets are legally isolated from the Authorised FirmG in order to ensure the assets are beyond the reach of the Authorised FirmG in the event of bankruptcy or receivership;
        (d) the SecuritiesG issued are not the obligations of the Authorised FirmG ;
        (e) the SecuritiesG are issued pursuant to the securitisation by an SPE and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction;
        (f) where a securitisation includes a Clean-Up CallG , Clean-Up CallsG must satisfy the conditions set out in PIB Rule A4.10.3.
        (g) the documentation of the securitisation does not contain any clauses that:
        (i) require the Authorised FirmG systematically to alter the underlying ExposuresG such that the pool's weighted average credit quality is improved unless this is achieved by selling ExposuresG to independent and unaffiliated third parties which are not ConnectedG to the Authorised FirmG or Related PersonsG of the Authorised FirmG in accordance with PIB Rule 4.4.6 at market prices;
        (ii) allow for increases in a retained First Loss PositionG or Credit EnhancementG provided by the Authorised FirmG after the securitisation's inception;
        (iii) other than step-up features incorporated in relation to the underlying ExposuresG of the securitisation, increase the yield payable to parties other than the Authorised FirmG , such as investors and third-party providers of Credit EnhancementsG , in response to deterioration in the credit quality of the underlying ExposuresG in the pool; or
        (iv) other than Clean-Up CallsG , oblige the Authorised FirmG to repurchase any of the underlying ExposuresG , at any time, except where that obligation arises from the exercise of a representation or warranty given by the Authorised FirmG . The Authorised FirmG may give a representation or warranty solely in respect of the nature or existing state of facts of any underlying ExposureG , that is capable of being verified, at the time of its transfer.
        (h) the transfer of the underlying ExposuresG or the transfer of risk through sub-participation does not contravene the terms and conditions of any underlying agreement in respect of the underlying ExposuresG and where applicable, all the necessary consents for the transfer or sub-participation have been obtained;
        (i) the documentation of the securitisation specifies that, if cash flows relating to the underlying ExposuresG are rescheduled or renegotiated, the SPE to which the ExposuresG have been transferred and not the Authorised FirmG , would be subject to the rescheduled or renegotiated terms;
        (j) the Authorised FirmG receives a fixed amount of consideration for the underlying ExposuresG ;
        (k) the Authorised FirmG holds not more than 20% of the aggregate original amount of all SecuritiesG issued by the SPE, except where such holdings comprise entirely of SecuritiesG that have a Credit Quality GradeG of 1 as set out in RulesG in sections PIB 4.11 and PIB 4.12, and all transactions with the SPE are conducted at arm's length and on market terms and conditions;
        (l) where the assets relate to the Islamic Financial BusinessG of an Authorised FirmG , a written confirmation from the appointed Shari'a Supervisory BoardG that the securitisation complies with Shari'a; and
        (m) each of the points (a) to (l) must be evidenced and confirmed by a legal opinion from a qualified legal counsel.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.10.1 Guidance

          1. An Authorised FirmG is deemed to have effective control over the transferred ExposuresG if :
          a. it is able to repurchase from the transferee the previously transferred ExposuresG in order to realise their benefits; or
          b. it is obligated to retain the risk of the transferred ExposuresG .
          2. In this regard, an Authorised FirmG acting as a ServicerG in respect of the transferred ExposuresG will not necessarily constitute effective control of the ExposuresG .
          3. In respect of PIB Rule A4.10.1(j), the amount of consideration received in the form of a fixed amount of SecuritiesG in the SPE would generally be regarded as meeting this requirement if the transaction is conducted at arm's length and on market terms and conditions. Also, this requirement does not preclude excess cash from being channelled to the Authorised FirmG after all claims connected with the SecuritiesG issued by the SPE have been paid out.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A4.10.2

        An Authorised FirmG which is an OriginatorG or a SponsorG of a Synthetic SecuritisationG may recognise the credit protection obtained through the Synthetic SecuritisationG in its calculation of Credit RWAG amounts only if all of the following conditions have been complied with:

        (a) significant Credit RiskG associated with the underlying ExposuresG has been transferred from the OriginatorG to third parties;
        (b) the instrument used to transfer the underlying Credit RisksG must not contain terms or conditions that limit in any way the amount of Credit RiskG transferred, including, but not limited to, clauses that:
        (i) materially limit the credit protection or Credit RiskG transference (e.g. significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs or those that allow for the termination of the protection due to deterioration in the credit quality of the underlying ExposuresG );
        (ii) require the Authorised FirmG to alter the underlying ExposuresG to improve the weighted average credit quality of the pool;
        (iii) increase the cost of credit protection to the Authorised FirmG in response to deterioration in the credit quality of the underlying ExposuresG ;
        (iv) increase the yield payable to parties other than the Authorised FirmG , such as investors and third-party providers of Credit EnhancementsG , in response to a deterioration in the credit quality of the underlying ExposuresG ; or
        (v) provide for increases in a retained First Loss PositionG or Credit EnhancementG provided by the originating bank after the transaction's inception.
        (c) an Authorised FirmG must provide an external legal opinion from a qualified legal counsel that confirms each of the points (i-v) and the enforceability of the contracts in all relevant jurisdictions;
        (d) where the assets relate to the Islamic Financial BusinessG of an Authorised FirmG , a written confirmation from the appointed Shari'a Supervisory BoardG that the securitisation complies with Shari'a;
        (e) where the securitisation includes a Clean-Up CallG it must meet the requirements of PIB Rule A4.10.3;
        (f) in the case where the risks associated with the underlying ExposuresG are transferred to an SPE:
        (i) the SecuritiesG issued by the SPE are not obligations of the Authorised FirmG ;
        (ii) the holders of the beneficial interests in that SPE have the right to pledge or exchange their interests without restriction; and
        (iii) the Authorised FirmG holds not more than 20% of the aggregate original amount of all SecuritiesG issued by the SPE, except where such holdings consist entirely of SecuritiesG that have a Credit Quality GradeG of 1 in accordance with RulesG in sections PIB 4.11 and PIB 4.12, and all transactions with the SPE are conducted at arm's length and on market terms and conditions;
        (g) the Authorised FirmG has, on an on-going basis, a comprehensive understanding of the risk characteristics of its individual securitisation ExposuresG , whether on- or off-balance sheet, as well as the risk characteristics of the pools underlying its securitisation ExposuresG ;
        (h) the Authorised FirmG is able to access performance information on the underlying ExposuresG on an on-going basis in a timely manner. Such information may include, as appropriate, ExposureG type, percentage of loans 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score or other measures of creditworthiness, average loan-to-value ratio, and industry and geographic diversification. For Re-securitisationsG , the Authorised FirmG should have information not only on the underlying securitisation tranches, such as the Issuers'G names and credit quality, but also on the characteristics and performance of the pools underlying the securitisation tranches; and
        (i) the Authorised FirmG has a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the transaction, such as the contractual waterfall and waterfall-related 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 A4.10.2 Guidance

          In relation to Rules PIB A4.10.1 and PIB A4.10.2, significant Credit RiskG will be considered to have been transferred by the OriginatorG of a securitisation if:

          a. the RWAG amounts of the mezzanine securitisation positions held by the OriginatorG in the securitisation do not exceed 50% of the RWAG amounts of all mezzanine securitisation positions existing in this securitisation; and
          b. where there are no mezzanine securitisation positions in a given securitisation and the OriginatorG can demonstrate that the ExposureG value of the securitisation positions that would be subject to deduction from Capital ResourcesG or a 1250% risk weight exceeds a reasonable estimate of the expected loss on the Securitised ExposuresG by a substantial margin, the OriginatorG does not hold more than 20% of the ExposuresG values of the securitisation positions that would be subject to deduction from Capital ResourcesG or a 1250% risk weight.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Operational Requirements for the Treatment of Clean-Up Calls

        • PIB A4.10.3

          Where a Clean-Up CallG is included within a securitisation, the Authorised FirmG which has the ability to exercise the Clean-Up CallG must ensure that:

          (a) the exercise of the Clean-Up CallG must not be mandatory, in form or substance;
          (b) the Clean-Up CallG must not be structured to avoid allocating losses to Credit EnhancementsG , or positions held by investors or in any way structured to provide Credit EnhancementG ; and
          (c) the Clean-Up CallG must only be exercisable when 10% or less of the original underlying ExposuresG or SecuritiesG issued in that securitisation remains, or in the case of a Synthetic SecuritisationG , when 10% or less of the original reference portfolio value remains.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.10.4

          Where the conditions listed in PIB Rule A4.10.3 are not met the Authorised FirmG must hold capital against the ExposuresG as follows:

          (a) for a Traditional SecuritisationG the underlying ExposuresG must be treated as if they had not been securitised;
          (b) Authorised FirmsG must not include any gain-on-sale in any element or component of their Capital ResourcesG ;
          (c) for Synthetic SecuritisationsG , the Authorised FirmG must hold capital against the entire amount of securitised ExposuresG ; and
          (d) where a Synthetic SecuritisationG incorporates a call that is not a Clean-Up CallG , the Authorised FirmG must treat the transaction in accordance with the relevant Credit RiskG mitigation techniques in PIB section 4.13.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.10.5

          An Authorised FirmG must treat a currency mismatch or a maturity mismatch between the underlying ExposureG being hedged and the Credit RiskG mitigation obtained through the Synthetic SecuritisationG in accordance with RulesG in sections PIB 4.13 and PIB A4.3.

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

    • PIB A4.11 Concentration Risk

      • Exempt Exposures

        • PIB A4.11.1

          An Authorised FirmG may treat the following ExposuresG as exempt from the Concentration RiskG limits in PIB chapter 4 if they are to CounterpartiesG not ConnectedG to the Authorised FirmG :

          (a) asset items or ExposuresG constituting claims on central governments and Central BanksG which receive a Credit Quality GradeG rating 1 or 2 in accordance with PIB Rule 4.12.4;
          (b) asset items or ExposuresG constituting claims on international organisations and multi-lateral development banks (MDBs) which receive a 0% (Credit Quality GradeG rating of 1) risk weight as set out at PIB Rule 4.12.7;
          (c) asset items or ExposuresG carrying the explicit guarantees of either (a) or (b) where the claims on the entity providing the guarantee would receive a 0% weighting (Credit Quality GradeG rating of 1);
          (d) ExposuresG for which the Authorised FirmG has CollateralG in the form of cash deposits or certificates of deposit, including certificates of deposit issued by the Authorised FirmG , held by the Authorised FirmG , or held by the Authorised Firm'sG ParentG Regulated Financial InstitutionG or a SubsidiaryG of the Authorised FirmG , but only if:
          (i) the Authorised FirmG and its ParentG Regulated Financial InstitutionG or the SubsidiaryG of the Authorised FirmG concerned are subject to consolidated supervision; and
          (ii) the enforceability requirements in PIB section 4.13 (Credit RiskG mitigation) are met;
          (e) ExposuresG arising from undrawn credit facilities that are classified as low risk off balance sheet items and provided that an agreement has been concluded with the client or group of ConnectedG clients under which the facility can only be drawn only if it has been ascertained that it will not cause the limit as set out in PIB Rule 4.15.5 to be exceeded;
          (f) ExposuresG secured by mortgages on residential property and leasing transactions under which the lessor retains full ownership of the residential property leased for as long as the lessee has not exercised his option to purchase, in all cases up to 50% of the value of the residential property concerned; and
          (g) material holdings in Regulated Financial InstitutionsG and other ExposuresG which have been deducted from an Authorised Firm'sG Capital ResourcesG as required in PIB chapter 3.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.11.1 Guidance:

            1. In order to be applicable under (c) the guarantees must meet the requirements of PIB section 4.13.9 in relation to Credit RiskG mitigation.
            2. An Authorised FirmG can only treat ExposuresG as CollateralisedG provided the conditions of Rules PIB 4.13.5 to PIB 4.13.8 (relating to Credit RiskG mitigation) are met. Item (d) also includes cash received under a credit linked noteG issued by the Authorised FirmG and loans and deposits of a CounterpartyG to or with the Authorised FirmG which are subject to an on balance sheet NettingG agreement recognised under PIB section 4.13 (Credit RiskG mitigation).
            3. The DFSAG may consider a waiver for other sovereign ExposuresG where there is a local regulatory requirement to hold assets with a national regulatory authority. Authorised FirmsG will be required to apply for a waiver of the Large ExposureG requirements in this regard and will be considered by the DFSAG on a case by case basis.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.2

          Where ExposuresG to a client are guaranteed by a third party, or secured by CollateralG issued by a third party, an Authorised FirmG may:

          (a) provided the CollateralG meets the requirements of PIB section 4.13 (Credit RiskG mitigation), and would be assigned a lower risk weight under PIB section 4.12, treat that portion of the ExposureG which is secured by CollateralG as an ExposureG to the third party. An Authorised FirmG must treat the portion secured by CollateralG as having being incurred to the third party providing the CollateralG rather than to the ClientG for the purposes of considering the limits as set out at PIB Rule 4.15.5; or
          (b) provided the guarantee meets the requirements of PIB section 4.13 (Credit RiskG mitigation), and would be assigned a lower risk weight under PIB section 4.12, treat that portion of the ExposureG which is guaranteed as an ExposureG to the third party. An Authorised FirmG must treat the portion guaranteed as having being incurred to the third party rather than to the ClientG for the purposes of considering the limits as set out at PIB Rule 4.15.5. When considering the guarantee there must not be any maturity mismatch between the guarantee and the underlying ExposureG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.3

          If an ExposureG is partially guaranteed by an Authorised Firm'sG ParentG Regulated Financial InstitutionG , and would be assigned a lower risk weight under PIB section 4.12, only that part of the ExposureG subject to the guarantee is exempt from the Concentration RiskG limits in PIB Rule 4.15.5. When considering the treatment of this RuleG an Authorised FirmG may also consider the exemptions permitted under PIB Rule 4.15.18 relating to parental guarantees.

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

      • Identification of Counterparties

        • PIB A4.11.4

          When calculating the ExposuresG of an Authorised FirmG , the firm must include Trading BookG ExposuresG and Non-Trading BookG ExposuresG to:

          (a) a single CounterpartyG ;
          (b) group of Closely RelatedG CounterpartiesG ;
          (c) Connected CounterpartiesG ; and,
          (d) TransactionsG , schemes or FundsG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.11.4 Guidance

            1. An individual CounterpartyG is a natural or legal person, which include governments, local authorities, public sector enterprises (PSEs), trusts, corporations, unincorporated businesses and non-profit-making bodies.
            2. Examples of a CounterpartyG include:
            a. the customer or borrower;
            b. where the Authorised FirmG is providing a guarantee, the person guaranteed;
            c. for a DerivativesG contract, the person with whom the contract was made;
            d. for most exchange-traded contracts involving a central clearing mechanism, that central clearing mechanism; and
            e. where a bill held by an Authorised FirmG has been accepted by another Financial InstitutionG , the acceptor.
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Group of Closely Related Counterparties

        • PIB A4.11.5

          (1) For Concentration RiskG purposes, PersonsG are Closely RelatedG if:
          (a) the insolvency or default of one of them is likely to be associated with the insolvency or default of the others;
          (b) it would be prudent when assessing the financial condition or creditworthiness of one to consider that of the others; or
          (c) there is, or is likely to be, a close relationship between the financial performance of those PersonsG .
          (2) PersonsG who are Closely RelatedG to each other are also ConnectedG with each other.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.6

          (1) A single group of Closely RelatedG CounterpartiesG means, in relation to an Authorised FirmG , all the PersonsG to which the Authorised FirmG has an ExposureG and which are Closely RelatedG to each other.
          (2) An Authorised FirmG must treat two or more PersonsG as falling within a group of Closely RelatedG CounterpartiesG if the Authorised FirmG has ExposuresG to them all and any loss to the Authorised FirmG on any of the ExposuresG to one is likely to be associated with a loss to the Authorised FirmG with respect to at least one ExposureG to each of the others.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.11.6 Guidance:

            Two or more CounterpartiesG between whom there is no relationship of control as described in Rules PIB A4.11.5 and PIB A4.11.6 will be regarded as constituting a single risk if they are so interconnected that, if one of them were to experience financial problems, in particular funding or repayment difficulties, the other or all of the others would also be likely to encounter funding or repayment difficulties.

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

      • Connected Counterparties

        • PIB A4.11.7

          For Concentration RiskG purposes, and in relation to a PersonG , a Connected CounterpartyG means another PersonG to whom the first PersonG has an ExposureG and who fulfils one of the following conditions:

          (a) he is ConnectedG to the first PersonG ;
          (b) he is an AssociateG of the first PersonG ;
          (c) the same PersonsG significantly influence the Governing BodyG of each of them; or
          (d) one of those PersonsG has an ExposureG to the other that was not incurred for the clear commercial advantage of both of them and which is not on arm's length terms.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.11.7 Guidance:

            A group of Connected CounterpartiesG would be considered to be such where the entities share the same ultimate owner even though they may not be formally structured as a GroupG .

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

      • Exposures to Transactions, Schemes or Funds

        • PIB A4.11.8

          Where an Authorised FirmG has an ExposureG to a transaction, scheme, FundG , or other ExposureG to a pool of underlying ExposuresG , the Authorised FirmG must assess the ExposureG to determine whether the ExposureG is a group of Closely RelatedG CounterpartiesG in its economic substance.

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

          • PIB A4.11.8 Guidance:

            1. When considering this RuleG the Authorised FirmG should consider the following factors:
            a. the structure, independence and control of the transaction, including governance arrangements;
            b. the inter relatedness of the underlying ExposuresG ;
            c. beneficial owners of the underlying ExposuresG and whether they could be deemed ConnectedG or Closely RelatedG ; and
            d. whether the transactions are conducted on an arm's length basis.
            2. An Authorised FirmG should look through the structure to determine whether there are any CounterpartiesG or ExposuresG that should be considered a Concentration RiskG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Connected Counterparty Exemptions

        • PIB A4.11.9

          An Authorised FirmG may treat as exempt from the Concentration RiskG limits in PIB chapter 4 an ExposureG to a CounterpartyG or CounterpartiesG ConnectedG to the Authorised FirmG if all of the following conditions are met:

          (a) the Authorised FirmG has given the DFSAG written notice one month in advance of its intention to use the exemption and explained how it will ensure that it will still meet the Concentration RiskG limits on a continuing basis when using the exemption;
          (b) the total amount of the ExposuresG that an Authorised FirmG is treating as exempt under this RuleG does not exceed 50% of the Authorised Firm'sG Capital ResourcesG ;
          (c) the Authorised FirmG makes and retains a record that identifies each ExposureG it has treated in this way;
          (d) the Authorised FirmG is subject to consolidated supervision;
          (e) the CounterpartyG is:
          (i) an Authorised FirmG which is the subject of consolidated supervision; or
          (ii) a member of the Authorised Firm'sG GroupG which is the subject of consolidated supervision to the satisfaction of the DFSAG ; and
          (f) the ExposureG satisfies one or more of conditions (i) to (iii):
          (i) it is a loan made by the Authorised FirmG with a maturity of one year or less in the course of the Authorised FirmG carrying on a treasury role for other members of its GroupG ;
          (ii) it is a loan to the ParentG of the Authorised FirmG made in the course of a business carried on by the Authorised FirmG of lending to its parent cash that is surplus to the needs of the Authorised FirmG , provided that the amount of that surplus fluctuates regularly; or
          (iii) it arises from the Authorised FirmG or a CounterpartyG ConnectedG to the Authorised FirmG operating a central risk management function for ExposuresG arising from DerivativesG contracts.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • Measuring Exposure to Counterparties and Issuers

        • PIB A4.11.10

          Rules PIB A4.11.12 to PIB A4.11.28 apply to both Non-Trading BookG and Trading BookG ExposuresG .

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

        • PIB A4.11.11

          When calculating an ExposureG , an Authorised FirmG must include accrued interest and dividends due.

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

        • PIB A4.11.12

          An Authorised FirmG must not offset Non-Trading BookG and Trading BookG ExposuresG .

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

        • PIB A4.11.13

          A net short position is not an ExposureG for the purposes of Concentration RiskG .

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

        • PIB A4.11.14

          The value of an Authorised Firm'sG ExposureG to a CounterpartyG , whether in its Non-Trading BookG or its Trading BookG , is the amount at risk calculated in accordance with PIB chapter 4.

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

      • Exposures to Issuers

        • PIB A4.11.15

          An Authorised FirmG must calculate the value of an ExposureG to the IssuerG of a SecurityG which is held in the Authorised Firm'sG Non-Trading BookG as the sum of the excess, where positive, of the book value of all long positions over all short positions (the net long position), for each identical instrument issued by that IssuerG .

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

        • PIB A4.11.16

          For the purposes of PIB Rule A4.11.15, short positions in one SecurityG may be used to offset long positions in a non-identical SecurityG issued by the same IssuerG if:

          (a) both SecuritiesG are denominated in the same currency; and
          (b) where both SecuritiesG are:
          (i) fixed rate or index-linked, and are within the same residual maturity time band; or
          (ii) floating rate.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.17

          An Authorised FirmG must calculate the value of an ExposureG to the IssuerG of a SecurityG that is held in the Authorised Firm'sG Trading BookG by calculating the excess of the current market value of all long positions over all short positions in all the SecuritiesG issued by that IssuerG .

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

        • PIB A4.11.18

          An Authorised FirmG must not offset an ExposureG to one IssuerG against an ExposureG to another even where the IssuersG are in a group of Closely RelatedG CounterpartiesG .

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

        • PIB A4.11.19

          An Authorised FirmG must include as a long position a commitment by it to buy:

          (a) a debt SecurityG or an equity at a future date; and
          (b) under a note issuance facility, at the request of the IssuerG , a SecurityG that is unsold on the issue date.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.20

          An Authorised FirmG must include as a short position a commitment by it to sell a debt SecurityG or equity at a future date.

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

        • PIB A4.11.21

          Where the equity leg of an equity swap is based on the change in value of an individual equity, it is treated as an ExposureG to the IssuerG of the equity.

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

          • PIB A4.11.21 Guidance

            An interest rate leg of an equity swap, or interest rate or currency swap does not generate an ExposureG to an IssuerG .

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

        • PIB A4.11.22

          When determining its ExposureG to an IssuerG arising from an OptionG , an Authorised FirmG must value the notional principal of an OptionG as the amount of principal underlying the OptionG .

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

        • PIB A4.11.23

          An Authorised FirmG must treat:

          (a) a written put OptionG as a long position in the underlying instrument valued at the strike price;
          (b) a written call OptionG as a short position in the underlying instrument valued at the strike price;
          (c) a purchased put OptionG as a short position in the underlying instrument valued at the strike price; and
          (d) a purchased call OptionG as a long position in the underlying instrument equal to the book value of the OptionG .
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.24

          An Authorised FirmG must, for the purposes of Concentration RiskG , treat an ExposureG to an IssuerG arising from an index or basket of debt SecuritiesG or a non-broad-based equity index or basket, as a series of ExposuresG to the IssuersG of the underlying instruments or equities in accordance with the procedures in PIB chapter 4.

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

          • PIB A4.11.24 Guidance

            Broadly based equity indices should not be broken down into their constituent stocks. A position related to a broadly based equity index does not generate an ExposureG to any IssuerG .

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

        • PIB A4.11.25

          An Authorised FirmG which receives cash on a repurchase agreement must treat the cash as if it is on its balance sheet and in accordance with sections PIB 4.9 and PIB 4.13. Any CollateralG received against repurchase agreements or SecuritiesG and commodities borrowing must also be treated as a balance sheet item under sections PIB 4.9 and PIB 4.13.

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

        • PIB A4.11.26

          An Authorised FirmG must treat a reverse repurchase agreement or SecuritiesG and commodities lending in its Non-Trading BookG as a collateralised loan and the CollateralG it holds as an asset, provided that the CollateralG is eligible financial CollateralG as defined in PIB Rule 4.13.5. If the CollateralG is not such an eligible financial CollateralG , the Authorised FirmG must treat the transaction as an unsecured loan to the CounterpartyG .

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

        • PIB A4.11.27

          An Authorised FirmG with repurchase agreements and reverse repurchase agreements in its Trading BookG has an ExposureG to:

          (a) the IssuerG of the SecurityG it has sold in a repurchase agreement; and
          (b) the CounterpartyG where the SecuritiesG or cash given by the Authorised FirmG exceed the SecuritiesG or cash it receives (i.e. there is a net margin given by the Authorised FirmG ) in a repurchase agreement or reverse repurchase agreement.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A4.11.28

          An Authorised FirmG must calculate in accordance with PIB section 5.10 an ExposureG to the IssuerG arising from the UnderwritingG or sub-underwriting of a new IssueG of SecuritiesG .

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

    • PIB A4.12 The Simplified Approach for Category 2 and 3A Firms

      • PIB A4.12.1

        This section applies only to an Authorised FirmG in CategoryG 2 or 3A for the purposes of PIB section 4.7.

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

      • PIB A4.12.2

        An Authorised FirmG that applies the Simplified ApproachG must comply with the requirements of PIB chapter 4 with the variations as prescribed below:

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

      • Risk Weights

        • Central Government and Central Bank Asset Class

          • PIB A4.12.3

            Under the Simplified ApproachG , Rules PIB 4.12.4 to PIB 4.12.5 are replaced by Rules PIB A4.12.4 to PIB A4.12.6.

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

          • PIB A4.12.4

            Subject to Rules PIB A4.12.5 and PIB A4.12.6, an Authorised FirmG must risk-weight any CR ExposureG in the central government and Central BankG asset class on the basis of the consensus country risk scores of export credit agencies (referred to in this section as "ECA") participating in the OECD's "Arrangement on Officially Supported Export Credits" and in accordance with the table below.

            Risk weights for the central government and Central BankG asset class

            ECA Risk Scores 0–1 2 3 4 to 6 7
            Risk WeightsG 0% 20% 50% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

            • PIB A4.12.4 Guidance

              The consensus country risk classification for the purpose of the "Arrangement on Officially Supported Export Credits" is published by the OECD. At the time of making of these RulesG , the classification was available on the OECD's website (http://www.oecd.org) in the Export Credit Arrangement web-page of the Trade DirectorateG .

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

          • PIB A4.12.5

            An Authorised FirmG must apply a 0% risk weight to any CR ExposureG to any central government or any Central BankG of a GCC member country, which is denominated in the domestic currency, and funded in the domestic currency of that GCC member country.

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

          • PIB A4.12.6

            For any CR ExposureG to any other central government or Central BankG which is denominated and funded in the local currency of that jurisdiction, an Authorised FirmG may apply such risk weights as may be specified by the banking regulator of that jurisdiction.

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

        • Bank Asset class

          • PIB A4.12.7

            Under the Simplified ApproachG , Rules PIB 4.12.10 to PIB 4.12.12 are replaced by the following PIB Rule A4.12.8.

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

          • PIB A4.12.8

            An Authorised FirmG must risk-weight any CR ExposureG in the bank asset class on the basis of the consensus ECA country risk scores as referred to in PIB A4.12.4 for the jurisdictions in which they are incorporated, in accordance with the following table:

            CRWs for the bank asset class

            ECA Risk Scores 0–1 2 3 4 to 6 7
            Risk WeightsG 20% 50% 100% 100% 150%
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • Corporate Asset Class

          • PIB A4.12.9

            Under the Simplified ApproachG , Rules PIB 4.12.13 to PIB 4.12.15 are replaced by the following PIB Rule A4.12.10.

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

          • PIB A4.12.10

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

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

        • Credit Risk Mitigation — Collateral

          • PIB A4.12.11

            Under the Simplified ApproachG , Rules PIB 4.13.5 to PIB 4.13.7 are replaced by the following Rules PIB A4.12.12 to PIB A4.12.14.

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

          • PIB A4.12.12

            An Authorised FirmG may only use the financial CollateralG Simplified ApproachG (FCSA) in its treatment of recognised CollateralG for the purposes of calculating the Credit RWAG for its ExposuresG booked in its Non-Trading BookG .

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

          • PIB A4.12.13

            (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 securities issued by sovereigns (including a central government or Central BankG ) of a jurisdiction that that has an ECA country risk score of 4 or better; and
            (d) any debt securities issued by a PSE that is treated as a sovereign and is of a jurisdiction that has an ECA country risk score of 4 or better.
            (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 A4.12.14

            In the case of any Counterparty RiskG ExposuresG in Rules PIB A4.12.12 and PIB A4.12.13, arising from an SFT which is 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]

        • Credit Risk Mitigation — Guarantees

          • PIB A4.12.15

            Under the Simplified ApproachG , Rules PIB 4.13.9 and PIB 4.13.10 are replaced by the following Rules PIB A4.12.16 to PIB A4.12.19.

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

          • PIB A4.12.16

            An Authorised FirmG may recognise guarantees provided by the following eligible guarantors:

            (a) the BankG for International Settlements, the International Monetary FundG , the European Central BankG , and the European CommissionG ;
            (b) the MDBs referred to in PIB Rule 4.12.8;
            (c) PSEs; and
            (d) other entities eligible for a CRW of 20% or better and with a lower risk weight than the CounterpartyG .
            Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

          • PIB A4.12.17

            For the purpose of calculating the risk weight of a guaranteed ExposureG , an Authorised FirmG must assign the guaranteed portion the risk weight of the eligible guarantors. The uncovered portion of the ExposureG must be assigned the risk weight of the underlying CounterpartyG .

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

          • PIB A4.12.18

            An Authorised FirmG can apply a 0% risk weight to any portions of ExposuresG guaranteed by central governments or Central BanksG of a GCC member country where the guarantee is denominated in the domestic currency of that country, and the ExposureG is funded in that same domestic currency.

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

          • PIB A4.12.19

            An Authorised FirmG must treat any materiality thresholds on payments below which no payment will be made in the event of loss as retained First Loss PositionsG and must deduct the full amount from its Capital ResourcesG .

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