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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
Laws
Rulebook Modules
Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER33/02-19]
PIB App5 Market Risk
Sourcebook Modules
Consultation Papers
Policy Statements
DFSA Codes of Practice
Amendments to Legislation
Media Releases
Notices
Financial Markets Tribunal
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  • PIB A5.3 Equity Risk Capital Requirement

    • PIB A5.3 Guidance

      PIB section A5.3 presents the method for the calculation of Equity Risk Capital RequirementG for the purpose of PIB Rule 5.5.1(b).

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

    • PIB A5.3.1

      An Authorised FirmG which calculates its Equity Risk Capital RequirementG in accordance with PIB Rule 5.5.1(b) must apply the RulesG in this section.

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

    • PIB A5.3.2

      An Authorised FirmG must calculate its Equity Risk Capital RequirementG by:

      (a) identifying all applicable positions within the scope of the requirement, including notional positions derived from certain instruments;
      (b) NettingG positions where they meet the conditions for NettingG set in PIB Rule A5.3.19;
      (c) calculating an Equity Risk Capital RequirementG for each individual position using the standard method in accordance with PIB Rule A5.3.23 or the simplified method in accordance with PIB Rule A5.3.31;
      (d) in the case of a forward, future, option or company issued warrant on an equity, basket of equities or equity index, adding an Interest Rate Risk Capital RequirementG ; and
      (e) summing the Capital RequirementsG calculated in accordance with (c) and (d).
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.3.2 Guidance

        For the purposes of PIB Rule A5.3.2(d), an Authorised FirmG is required to calculate the applicable Interest Rate Risk Capital RequirementG in accordance with PIB Rule A5.2.13 and the other applicable RulesG in PIB section A5.2.

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

    • PIB A5.3.3

      (1) For the purposes of PIB Rule A5.3.2(a) an Authorised FirmG must calculate an Equity Risk Capital RequirementG for long and short Trading BookG positions in equities and instruments which exhibit behaviour similar to equities including but not limited to:
      (a) depository receipts;
      (b) futures or forwards on an equity, baskets of equities or equity indices;
      (c) net underwriting commitments; and
      (d) investments in unleveraged Collective Investment FundsG .
      (2) An Authorised FirmG should calculate either an Equity Risk Capital RequirementG or an Option Risk Capital RequirementG for a Trading BookG position in:
      (a) an equity hedging an option;
      (b) an equity hedging a company-issued warrant;
      (c) an option on an equity, basket of equities, equity index or equity future provided it is in the money by at least the risk percentage stipulated in PIB A5.3.31; and
      (d) a company issued warrant which relates to an equity, basket of equities or equity index provided it is in the money by at least the risk percentage stipulated in PIB A5.3.31.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.3.3 Guidance

        1. If an Authorised FirmG has an investment in a leveraged Collective Investment FundG , it should seek guidance from the DFSAG in respect of the appropriate prudential treatment.
        2. In respect of options that are out of the money, an Authorised FirmG must apply the requirements of PIB section 5.8.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A5.3.4

      An Authorised FirmG must calculate either an Equity Risk Capital RequirementG or an Option Risk Capital RequirementG for a Trading BookG position in the equity leg of an equity swap in accordance with PIB Rule A5.3.12.

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

    • PIB A5.3.5

      An Authorised FirmG must calculate either an Equity Risk Capital RequirementG or Interest Rate Risk Capital RequirementG for a Trading BookG position in a ConvertibleG in accordance with Rules PIB A5.3.6 and PIB A5.3.7.

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

    • PIB A5.3.6

      An Authorised FirmG must treat a ConvertibleG as the underlying equity into which it converts, where:

      (a) the first date at which conversion can take place is less than three months ahead, or the next such date (where the first has passed) is less than a year ahead; and
      (b) the ConvertibleG is trading at a premium of less than 10% to the underlying equity.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A5.3.7

      An Authorised FirmG which treats a ConvertibleG as an equity must make an adjustment to the capital component as follows:

      (a) an addition equal to any loss on conversion; or
      (b) a deduction equal to any profit on conversion (subject to a maximum reduction to zero).
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A5.3.8

      An Authorised FirmG must not calculate an Equity Risk Capital RequirementG for a Trading BookG position in:

      (a) material holdings deducted under PIB chapter 3 for the purposes of calculating an Authorised Firm'sG Capital ResourcesG ;
      (b) the interest rate leg of an equity swap, equity future or forward, or equity based option; or
      (c) a non-ConvertibleG preference security.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Derivation of Notional Positions

      • PIB A5.3.9

        An Authorised FirmG must, before NettingG , derive a notional position for a depository receipt, a swap, a future, a forward, an option and a company issued warrant in the calculation of its Equity Risk Capital RequirementG .

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

    • Depository receipts

      • PIB A5.3.10

        An Authorised FirmG must treat a depository receipt as a notional position in the underlying equity.

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

      • PIB A5.3.11

        A position in a depository receipt must only be netted against a position in the underlying equity if the equity is deliverable against the depository receipt.

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

    • Equity Swaps

      • PIB A5.3.12

        An Authorised FirmG must treat an equity swap as two notional positions: an interest rate leg and an equity leg, as follows:

        (a) the interest rate leg must be included in the Interest Rate RiskG Calculation and treated as a notional government SecurityG in accordance with the provisions for interest rate swaps in PIB section 5.4; and.
        (b) the equity leg must be treated as a long or short position in:
        (i) where the payout or receipt of funds is based on, respectively, the appreciation or depreciation in price of the underlying equities, a future; or
        (ii) where the payout is the appreciation in price of the underlying equities, an option, in which case the Authorised FirmG must calculate an Option Risk Capital RequirementG in accordance with PIB section 5.8.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Equity Futures and Forwards

      • PIB A5.3.13

        An Authorised FirmG must treat a future or forward on a single equity as a notional position in the underlying equity. In addition, an interest rate leg must be included in the interest rate risk calculation in PIB section 5.4 as a notional government security.

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

      • PIB A5.3.14

        An Authorised FirmG must treat a future or forward on a single country equity index as either:

        (a) notional positions in the constituent equities; or
        (b) a single notional position.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.3.15

        Where PIB Rule A5.3.14(b) applies, an Authorised FirmG must apply the highest risk percentage to the single notional position that would apply to any one of its constituents.

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

      • PIB A5.3.16

        An Authorised FirmG must treat a future or forward on a multiple country equity index as either:

        (a) notional positions in the constituent equities; or
        (b) a number of notional positions being one for each of the countries which is represented in the index, in the proportion of that country's representation in the index.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.3.17

        Where PIB Rule A5.3.16(b) applies, an Authorised FirmG must apply the highest risk percentage to each notional position that would apply to any one of its constituents.

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

    • Equity Options and Company Issued Warrants

      • PIB A5.3.18

        An Authorised FirmG must treat an option or company issued warrant on an equity, basket of equities or equity index that is eligible to be included in the equity method as a notional position in the underlying equity or equities as follows:

        (a) a purchased call option and a written put option must be treated as a long position; and
        (b) a purchased put option and a written call option must be treated as a short position.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Netting

      • Netting Guidance

        1. Before calculating the Equity Risk Capital RequirementG , positions may be netted in order to produce the individual net position.
        2. Since the NettingG of positions for Equity Risk Capital RequirementG purposes does not involve legal or contractual issues, this material appears here rather than in the NettingG section of the Credit RiskG chapter.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A5.3.19

      (1) An Authorised FirmG may only net equity positions when:
      (a) long and short (including notional) positions are in the same tranche of the same equity; and
      (b) long and short (including notional) positions are in different tranches of the same equity where the tranches enjoy the same rights in all respects and become fungible within one hundred and eighty days, and thereafter the equity of one tranche can be delivered in settlement of the equity of the other tranche.
      (2) For the purposes of (1)(a), an equity is the same as another, only if they enjoy the same rights in all respects and are fungible with each other.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Calculation of the Equity Risk Capital Requirement

      • Calculation of the Equity Risk Capital Requirement Guidance

        There are two methods for calculating the Equity Risk Capital RequirementG : the standard method and the simplified method. The standard method requires two separate calculations. The first is Specific RiskG and the second is General Market RiskG . The simplified method is easier to calculate but usually results in a higher Capital RequirementG than the standard method. In addition, Authorised FirmsG must calculate an Interest Rate Risk Capital RequirementG for a forward, a future, an option or a company issued warrant.

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

    • PIB A5.3.20

      (1) An Authorised FirmG must allocate an equity position or notional position to the country in which the equity is listed.
      (2) An equity listed in more than one country must be allocated to one of the countries in which it is listed.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A5.3.21

      An Authorised FirmG must allocate an unlisted equity to the country in which it is issued.

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

    • The Concentration Test

      • PIB A5.3.22

        An Authorised FirmG must apply either the standard method or simplified method to an equity position, except that where an individual net position exceeds 20% of the sum of the long and short positions (ignoring the sign) of its country portfolio, the simplified method must be applied to the excess.

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

        • PIB A5.3.22 Guidance

          The part of the individual net position that does not exceed 20% may be treated under the simplified or standard method.

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

    • Standard Method

      • PIB A5.3.23

        Under the standard method, the total Equity Risk Capital RequirementG is the sum of the Specific RiskG requirements for all individual net equity positions and the General Market RiskG requirements calculated separately for each country.

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

    • Specific Risk

      • PIB A5.3.24

        Specific RiskG must be calculated for each net position in an individual equity.

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

      • PIB A5.3.25

        The Specific RiskG of each individual net equity position is its market value (ignoring the sign) multiplied by 8%.

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

      • PIB A5.3.26

        [Not currently in use]

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

      • PIB A5.3.27

        [Not currently in use]

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

      • PIB A5.3.28

        [Not currently in use]

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

      • PIB A5.3.29

        An Authorised FirmG must calculate General Market RiskG on a country-by-country basis.

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

      • PIB A5.3.30

        An Authorised FirmG must calculate the General Market RiskG for each country in the following way:

        (a) all individual net positions are multiplied by 8%;
        (b) long and short positions in each country portfolio are netted; and
        (c) if the net equity position is negative, the sign must be reversed.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Simplified Method

      • PIB A5.3.31

        The Equity Risk Capital RequirementG for each country is the sum of the market value of all individual net positions (ignoring the sign) multiplied by the appropriate risk percentage in the table below:

          Percentage risk
        Single equities 16%
        Broad-based indices (not broken down into constituent equities) 8%
        All other indices (not broken down into constituent equities) 16%
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.3.32

        For the purposes of PIB Rule A5.3.31, a broad-based index means an index specified in the table under (c) or an index that satisfies the following criteria:

        (a) the index contains at least 20 shares;
        (b) the weighting of the largest company is not greater than 20% of the total index; and
        (c) the weighting of the largest five companies is not greater than 60% of the total index.
        Australia All Ordinaries
        Austria Austrian Traded Index
        Belgium BEL 20
        Canada TSE 35, TSE 100, TSE 300
        France CAC 40, SBF 250
        Germany DAX
        European Dow Jones Stoxx 50 Index, FTSE Eurotop 300, MSCI Euro Index
        Hong Kong Hang Seng
        Italy MIB 30
        Japan Nikkei 225, Nikkei 300, TOPIX
        Korea Kospi
        Netherlands AEX
        Singapore Straits Times Index
        Spain IBEX 35
        Sweden OMX
        Switzerland SMI
        UK FTSE 100, FTSE Mid 250, FTSE All Share
        US S&P 500, Dow Jones Industrial Average, NASDAQ Composite, Russell 2000
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]