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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
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Financial Markets Tribunal
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  • PIB A5.8 Securities Underwriting Risk Capital Requirement

    • PIB A5.8 Guidance

      PIB section A5.8 presents the method for calculating a net UnderwritingG position or reduced net UnderwritingG position, which is then included in the calculation of Market Risk Capital RequirementsG as specified in this chapter. PIB section A5.8 also deals with Concentration RiskG .

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

    • PIB A5.8.1

      (1) An Authorised FirmG which calculates its Securities Underwriting Risk Capital RequirementG in accordance with PIB Rule 5.10.7(b) must apply the RulesG in this section.
      (2) An Authorised FirmG which underwrites or sub-underwrites an issue of SecuritiesG must, for the purposes of calculating its Market Risk Capital RequirementG :
      (a) identify commitments to underwrite or sub-underwrite which give rise to an underwriting position;
      (b) identify the time of initial commitment; and
      (c) calculate the net UnderwritingG position, reduced net UnderwritingG position or the net UnderwritingG ExposureG .
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A5.8.2

      An Authorised FirmG must include the net UnderwritingG position or reduced net UnderwritingG position where:

      (a) debt SecuritiesG are being underwritten;
      (b) equities are being underwritten; or
      (c) WarrantsG are being underwritten.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.8.2 Guidance

        1. Sub-underwriting is a commitment given by one firm to someone other than the IssuerG or seller of the SecuritiesG to sub-underwrite all or part of an issue of SecuritiesG . The net UnderwritingG position calculated in PIB Rule A5.8.6 will also be used in calculating the net UnderwritingG ExposureG under Rules PIB A5.8.11 to PIB A5.8.14.
        2. The net UnderwritingG position or reduced net UnderwritingG position arising from UnderwritingG or sub-underwriting a rights or WarrantsG issue should be calculated using the current market price of the underlying SecurityG for the purposes of the Equity Risk Capital RequirementG or Option Risk Capital RequirementG . However, the risk Capital RequirementsG will be limited to the value of the net UnderwritingG position calculated using the initial issue price of the rights or WarrantsG . Where there is no market price because the rights or WarrantsG are in relation to a new class of SecuritiesG and the initial price has not been set the net UnderwritingG position or reduced net UnderwritingG is the amount of the commitment.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Commitment to Underwrite Securities

      • PIB A5.8.3

        (1) For the purpose of PIB Rule A5.8.1, an Authorised FirmG underwrites or sub-underwrites an issue of SecuritiesG where:
        (a) it gives a commitment to an IssuerG of SecuritiesG to underwrite an issue of SecuritiesG ;
        (b) in the case of new SecuritiesG (as defined in PIB Rule A5.8.4) it gives a commitment to a seller of SecuritiesG to underwrite a sale of those SecuritiesG ;
        (c) it gives a commitment to a person, other than the IssuerG of SecuritiesG or, if (b) applies, the seller of the SecuritiesG , to sub-underwrite an issue of SecuritiesG ; or
        (d) it is a member of a syndicate or GroupG that gives a commitment of the type described in (a) to (c).
        (2) Unless a RuleG deals with an issue of SecuritiesG separately or the context otherwise requires, a provision of PIB section A5.8 that deals with UnderwritingG also applies to sub-underwriting.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A5.8.3 Guidance

          Block trades, including bought deals, and private placements are not within the scope of this chapter because they involve an outright purchase by an Authorised FirmG of the relevant SecuritiesG .

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

      • PIB A5.8.4

        For the purposes of PIB Rule A5.8.3(b), an Authorised FirmG must treat SecuritiesG as being new if they are:

        (a) SecuritiesG that, prior to the allotment following the UnderwritingG , were not in issue; or
        (b) SecuritiesG that have not previously been offered for sale or subscription to the public and have not been admitted to trading on a market operated by an Authorised Market InstitutionG or an overseas investment exchange.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Grey Market Transactions

      • PIB A5.8.5

        (1) An Authorised FirmG that buys and sells SecuritiesG before issue is dealing in the grey market for the purposes of this section.
        (2) The other RulesG in PIB section A5.8 do not apply to an Authorised FirmG with respect to its dealings in the grey market unless the Authorised FirmG :
        (a) has an UnderwritingG commitment to the IssuerG in respect of those SecuritiesG ; or
        (b) has a sub-underwriting commitment in respect of those SecuritiesG and is using the grey market solely for the purpose of reducing that sub-underwriting commitment.
        (3) The other RulesG in PIB section A5.8 do not apply to an Authorised FirmG with respect to its dealings in the grey market if the transaction is undertaken by the proprietary trading part of the Authorised FirmG or is undertaken for proprietary trading purposes.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A5.8.5 Guidance

          In PIB Rule A5.8.5, the grey market is the market in which dealers "buy" and "sell" securities ahead of issue. In reality the dealers are buying and selling promises to deliver the securities when issued.

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

    • Calculating the Net Underwriting Position

      • PIB A5.8.6

        An Authorised FirmG must calculate a net UnderwritingG position from the date of initial commitment until the UnderwritingG process ends, as the initial gross commitment adjusted for:

        (a) UnderwritingG or sub-underwriting commitments obtained from others since the time of initial commitment;
        (b) purchases or sales of the SecuritiesG since the time of initial commitment;
        (c) any allocation of SecuritiesG granted or received, arising from the commitment to underwrite the SecuritiesG , since the time of initial commitment; and
        (d) in the case of sales in the grey market, as defined in PIB Rule A5.8.5, any sales of the SecuritiesG as at the time of initial commitment or since the time of initial commitment is subject, in both cases, to the following conditions:
        (i) any sales of the SecuritiesG as at the time of initial commitment must be confirmed in writing at the time of initial commitment;
        (ii) sales must be net of any purchases in the grey market; and
        (iii) any allocation of SecuritiesG granted or received, arising from the commitment to underwrite the SecuritiesG , since the time of initial commitment.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A5.8.7

        If the allocation of SecuritiesG has not been fixed, an Authorised FirmG must calculate the gross amount of its commitment, for the purpose of PIB Rule A5.8.6, by reference to the maximum amount it has committed to underwrite until the time the allocation is set. An UnderwritingG commitment may only be reduced under this RuleG on the basis of a formal agreement.

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

        • PIB A5.8.7 Guidance

          Allocations may arise, after date of initial commitment, from the agreement to underwrite. For example, obligations or rights may be allocated to or from the IssuerG , the underwriting GroupG or syndicate.

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

    • Time of Initial Commitment

      • PIB A5.8.8

        (1) Subject to (2), the time of initial commitment is the earlier of:
        (a) in the case of UnderwritingG , the time the Authorised FirmG agrees with the IssuerG of SecuritiesG to underwrite those SecuritiesG ;
        (b) in the case of UnderwritingG falling under PIB Rule A5.8.3(b), the time the Authorised FirmG agrees with the seller of SecuritiesG to underwrite those SecuritiesG ;
        (c) in the case of sub-underwriting, the time the Authorised FirmG agrees with the PersonG referred to PIB Rule A5.8.3(c) to sub-underwrite those SecuritiesG ;
        (d) in the case of PIB Rule A5.8.3(d), the time the GroupG or syndicate in question (or a member of that GroupG or syndicate on behalf of the others) agrees with the IssuerG or other PersonG to whom the commitment is given as referred to in PIB Rule A5.8.3(d) to underwrite or sub-underwrite the SecuritiesG in question; or
        (e) if the firm at that time has a commitment (whether legally or binding or not), the time the price and allocation of the issue or offer are set.
        (2) If an Authorised FirmG has an irrevocable and unfettered right to withdraw from an underwriting commitment, exercisable within a certain period, the commitment commences (and thus the time of initial commitment occurs) when that right expires.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Working Day 0

      • PIB A5.8.9

        For the purposes of PIB section A5.8, working day 0 is the business day on which a firm that is UnderwritingG or sub-underwriting becomes unconditionally committed to accepting a known quantity of SecuritiesG at a specified price.

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

        • PIB A5.8.9 Guidance

          For debt issues and securities which are issued in a similar manner, working day 0 is the later of the date on which the securities are allotted and the date on which payment for them is due. For equity issues and securities which are issued in a similar manner, working day 0 is the later of the date on which the offer becomes closed for subscriptions and the date on which the allocations are made public. For rights issues, working day 0 is the first day after the date on which the offer becomes closed to acceptances for subscription.

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

    • Calculating the Reduced Net Underwriting Position

      • PIB A5.8.10

        To calculate the reduced net UnderwritingG position an Authorised FirmG must apply the reduction factors in the table below to the net UnderwritingG position calculated under PIB Rule A5.8.6 as follows:

        (a) in respect of debt SecuritiesG , an Authorised FirmG must calculate two reduced net UnderwritingG positions; one for inclusion in the Authorised Firm'sG interest rate Specific RiskG calculation, the other for inclusion in its interest rate General Market RiskG calculation; and
        (b) in respect of equities, an Authorised FirmG must calculate only one reduced net UnderwritingG position, and then include it in the simplified equity method.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Reduction Factors

        Debt Issue Equity Issue
      UnderwritingG Timeline General Market RiskG Specific RiskG General Market RiskG Specific RiskG
      Date of initial commitment until working day 0 0% 100% 90% 90%
      Working day 1 0% 90% 90% 90%
      Working day 2 0% 75% 75% 75%
      Working day 3 0% 75% 75% 75%
      Working day 4 0% 50% 50% 50%
      Working day 5 0% 25% 25% 25%
      Working day 6 and onwards 0% 0% 0% 0%
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Large Exposure Risk from Underwriting Securities: Calculating the Net Underwriting Exposure

      • PIB A5.8.11

        For Concentration RiskG purposes, the total amount of an Authorised Firm'sG Trading BookG ExposuresG to any PersonG must include net UnderwritingG ExposureG to that PersonG .

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

      • PIB A5.8.12

        An Authorised FirmG must include any other ExposuresG arising out of underwriting (including any CounterpartyG ExposuresG to any sub-underwriters) for the purposes of calculating the total amount of its Trading BookG ExposuresG to a PersonG for Concentration RiskG purposes.

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

      • PIB A5.8.13

        An Authorised FirmG , before entering into a new UnderwritingG commitment, must be able to recalculate the Concentration RiskG capital component to the level of detail necessary to ensure that the firm's Capital ResourcesG Requirement does not exceed the firm's Capital ResourcesG .

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

      • PIB A5.8.14

        An Authorised FirmG must calculate the net UnderwritingG ExposureG to an IssuerG by applying the relevant reduction factors in the table below to its net UnderwritingG position calculated under PIB Rule A5.8.6.

        Time Reduction factor to be applied to net underwriting position
        Initial commitment to working day 0 100%
        Working day 0 100%
        Working day 1 90%
        Working day 2 75%
        Working day 3 75%
        Working day 4 50%
        Working day 5 25%
        Working day 6 onwards 0%
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A5.8.14 Guidance

          The effect of the RuleG and the table above is that there is no concentration limit for net UnderwritingG ExposuresG between initial commitment and the end of working day 0.

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

    • Risk management

      • PIB A5.8.15

        (1) An Authorised FirmG must take reasonable steps to establish and maintain such systems and controls to monitor and manage its UnderwritingG and sub-underwriting business as are appropriate to the nature, scale and complexity of its UnderwritingG and sub-underwriting business.
        (2) In particular, an Authorised FirmG must have systems to monitor and control its UnderwritingG ExposuresG between the time of the initial commitment and working day one in the light of the nature of the risks incurred in the markets in question.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A5.8.15 Guidance

          An Authorised FirmG should take reasonable steps to:

          a. allocate responsibility for the management of its UnderwritingG and sub-underwriting business;
          b. allocate adequate resources to monitor and control its UnderwritingG and sub-underwriting business;
          c. satisfy itself that its systems to monitor ExposureG to CounterpartiesG will calculate, revise and update its ExposureG to each CounterpartyG arising from its UnderwritingG or sub-underwriting business;
          d. satisfy itself of the suitability of each person who performs functions for it in connection with the firm's UnderwritingG and sub-underwriting business having regard to the person's skill and experience; and
          e. satisfy itself that its procedures and controls to monitor and manage its UnderwritingG business address, on an on-going basis, the capacity of sub-underwriters to meet sub-underwriting commitments.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]