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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
Laws
Rulebook Modules
Prudential — Investment, Insurance Intermediation and Banking Module (PIB) [VER33/02-19]
Sourcebook Modules
Consultation Papers
Policy Statements
DFSA Codes of Practice
Amendments to Legislation
Media Releases
Notices
Financial Markets Tribunal
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  • PIB App6 Calculating the Operational Risk Capital Requirement

    • PIB App6 Guidance

      1. PIB section 6.11 provides that an Authorised FirmG in CategoriesG 1, 2, 3A and 5 must use the Basic Indicator ApproachG to calculate its Operational RiskG Capital RequirementG , unless the firm has approval from the DFSAG to use the Standardised ApproachG or Alternative Standardised ApproachG . In this PIB App6:
      a. the Basic Indicator ApproachG is prescribed in PIB section A6.1;
      b. the Standardised ApproachG is prescribed in PIB section A6.2; and
      c. the Alternative Standardised ApproachG is prescribed in PIB section A6.3.
      2. The application of various components of the rules on Operational RiskG to Authorised FirmsG licensed to carry out various financial services is detailed in the table below:
      Financial ServicesG Prudential CategoryG Capital requirement Systems and controls requirement PII cover
      Accepting DepositsG 1 YES YES NO
      Providing CreditG 2 YES YES NO
      Dealing in Investments as PrincipalG 2 YES YES NO
      Dealing in InvestmentsG as Matched PrincipalG 3A YES YES NO
      Dealing in Investments as AgentG 3A YES YES NO
      Managing AssetsG 3B NO YES YES
      Managing a Collective Investment FundG 3B NO YES YES
      Managing a Restricted PSIAG 3B NO YES YES
      Providing CustodyG 3B or 3C NO YES YES
      Providing Trust ServicesG 3B NO YES YES
      Acting as the Trustee of a FundG 3C NO YES YES
      Arranging Deals in InvestmentsG 4 NO YES YES
      Advising on Financial ProductsG 4 NO YES YES
      Arranging CustodyG 4 NO YES NO
      Insurance IntermediationG 4 NO YES YES
      Insurance ManagementG 4 NO YES YES
      Providing Fund AdministrationG 4 NO YES YES
      Operating an Alternative Trading SystemG 4 NO YES NO
      Arranging Credit and Advising on CreditG 4 NO YES YES
      Managing an Unrestricted PSIAG 5 or 1 YES YES NO
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
      [Amended] DFSA RM188/2016 (Made 7th December 2016). [VER26/02-17]

    • PIB A6.1 Basic Indicator Approach

      • PIB A6.1.1

        (1) An Authorised FirmG which uses the Basic Indicator ApproachG must calculate its Operational RiskG Capital RequirementG equal to the average over the previous three years of a fixed percentage (denoted alpha) of positive annual gross income.
        (2) In (1), if the figure for annual gross income in any of the previous three years is zero or negative an Authorised FirmG must exclude such amounts from the calculation of the average.
        (3) The Operational RiskG Capital RequirementG in (1) must be calculated according to the following formula:

        KBIA = [Σ(GI1...n Xα)] / n

        where:

        KKIA = the Operational RiskG Capital RequirementG under the Basic Indicator ApproachG

        GI = the gross annual income, where positive, over the previous three years

        n = number of the previous three years for which gross income is positive

        α = 15%,
        (4) For the purpose of (1), "gross income" is net interest income plus net non-interest income and must:
        (a) be gross of any provisions (e.g. for unpaid interest);
        (b) be gross of operating expenses, including fees paid to outsourcing service providers;
        (c) exclude realised profits/losses from the sale of SecuritiesG in the Non-Trading BookG ; and
        (d) exclude extraordinary or irregular items as well as income derived from insurance recoveries.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A6.1.1 Guidance

          1. In PIB A6.1.1(1), the three year average should be calculated on the basis of the last three yearly observations at the end of the Authorised Firm'sG financial year. When audited figures are not available, business estimates may be used.
          2. If an Authorised FirmG does not have sufficient income data to meet the three year requirement (e.g. a start-up), it may use its forecasted gross income projections for all or part of the three year time period. For example, if an Authorised FirmG has two positive yearly gross incomes of USD 20 each and the final yearly observation shows a negative figure of USD 5, then the average should be calculated as USD 20 being USD 40 (sum of positive figures) divided by 2 (number of years for which positive figures are available).
          3. NetG interest income in PIB A6.1.1(4) is the interest income minus interest expense. GuidanceG on what constitutes interest income and interest expense can be found in the PRUG module.
          4. NetG non-interest income in PIB A6.1.1(4) includes the income from fees and commissions, net income from trading SecuritiesG , net income from investment SecuritiesG , income from Islamic contractsG and other operating income minus fee and commission expense. GuidanceG on non-interest income can be found in the PRUG module.
          5. In PIB A6.1.1(4)(ii), outsourcing fees paid by the Authorised FirmG should be excluded whereas any outsourcing fee received by the Authorised FirmG should be included as part of the gross income.
          6. When income from revaluation of trading items is included in the income statement, such revaluation income should be included in the calculation of the gross income.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • PIB A6.2 Standardised Approach

      • PIB A6.2.1

        An Authorised FirmG which uses the Standardised ApproachG :

        (a) must calculate its Operational RiskG Capital RequirementG equal to the average annual gross income over the previous three years for each of the business lines in PIB Rule A6.2.3 multiplied by the fixed percentage (denoted beta) in PIB Rule A6.2.3;
        (b) subject to (c), may in any given year offset negative a Capital RequirementG (resulting from negative gross income) in any business line against positive capital charges in other business lines without limit; and
        (c) must input to the numerator a value of zero if the aggregate Operational RiskG Capital RequirementG across all business lines within a given year is negative.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

      • PIB A6.2.2

        An Authorised FirmG which uses the Standardised ApproachG must calculate its Operational RiskG Capital RequirementG according to the following formula:

        KSA = {Σ years 1–3 max[Σ(GI 1–8X B1–8) , 0]}/ 3

        where:

        KSA = the capital charge under the Standardised ApproachG

        GI1–8 = annual gross income in a given year, as defined above in the Basic Indicator ApproachG , for each of the eight business lines

        B1–8 = a fixed percentage set out in PIB Rule A6.2.3.

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

      • PIB A6.2.3

        An Authorised FirmG which uses the Standardised ApproachG must calculate its Operational RiskG Capital RequirementG using the following beta values:

        Business Line Beta Factor
        Corporate finance 18%
        Trading and sales 18%
        Retail banking 12%
        Commercial banking 15%
        Payment and settlement 18%
        Agency services 15%
        Asset management 12%
        Retail brokerage 12%
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A6.2.3 Guidance

          The gross income is measured for each business line, not the whole institution, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.

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

    • PIB A6.3 Alternative Standardised Approach

      • PIB A6.3.1

        An Authorised FirmG which uses the Alternative Standardised ApproachG must calculate its Operational RiskG Capital RequirementG in accordance with the Standardised ApproachG in PIB section A6.2 as modified by replacing annual gross income for its retail banking and commercial banking business lines with loans and advances multiplied by a fixed factor 'm'.

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

      • PIB A6.3.2

        Subject to PIB Rule A6.3.4, an Authorised FirmG which uses the Alternative Standardised ApproachG must calculate its Operational RiskG Capital RequirementG for its retail banking business line according to the following formula:

        KRB = BRB x m x LARB

        Where:

        KRB = the Capital RequirementG for the retail banking business line

        BRB = the beta for the retail banking business line

        LARB = total outstanding retail loans and advances (non-risk weighted and gross of provisions), averaged over the past three years

        m = 0.035

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

      • PIB A6.3.3

        Subject to PIB Rule A6.3.4, an Authorised FirmG which uses the Alternative Standardised ApproachG must calculate its Operational RiskG Capital RequirementG for its commercial banking business line according to the following formula:

        KCB =BCB x m x LACB

        Where:

        KCB = the Capital RequirementG for the commercial banking business line

        BCB = the beta for the commercial banking business line

        LACB = total outstanding commercial banking loans and advances (non-risk weighted and gross of provisions), averaged over the past three years

        m = 0.035

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

      • PIB A6.3.4

        An Authorised FirmG may, in calculating its Operational RiskG Capital RequirementG under PIB Rule A6.3.1:

        (a) aggregate retail and commercial banking using a single beta of 15%; or
        (b) if it is unable to disaggregate gross income in its six other business lines, aggregate the total gross income for these six business lines using a beta of 18%, with negative gross income treated as described in the Standardised ApproachG .
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

        • PIB A6.3.4 Guidance

          1. For the purposes of the Alternative Standardised ApproachG , total loans and advances in the retail banking business line consist of the total drawn amounts in the following credit portfolios: retail, SMEs treated as retail, and purchased retail receivables.
          2. For commercial banking, total loans and advances consist of the drawn amounts in the following credit portfolios: corporate, sovereign, bank, specialised lending, SMEs treated as corporate and purchased corporate receivables. The book value of securities held in the Non-Trading BookG should also be included.
          3. The three year average should be calculated on the basis of the last three yearly observations at the end of the Authorised Firm'sG financial year. When audited figures are not available, business estimates may be used.
          4. If an Authorised FirmG does not have sufficient income data to meet the three year requirement (e.g. a start-up) it may use its forecasted gross income projections for all or part of the three year time period.
          5. In accordance with PIB Rule 6.11.3 of PIBG , an Authorised FirmG seeking to apply the Standardised ApproachG or the Alternative Standardised ApproachG must develop specific policies and have documented criteria for mapping gross income for current business lines and activities into the Standardised ApproachG or the Alternative Standardised ApproachG . The criteria must be reviewed and adjusted for new or changing business activities as appropriate. The principles for business line mapping are set out below.

          PrinciplesG for business line mapping

          6. All activities should be mapped into the eight level 1 business lines in a mutually exclusive and jointly exhaustive manner.
          7. Any activity which cannot be readily mapped into the business line framework, but which represents an ancillary function to an activity included in the framework, should be allocated to the business line it supports. If more than one business line is supported through the ancillary activity, an objective mapping criteria should be used.
          8. When mapping gross income, if an activity cannot be mapped into a particular business line then the business line yielding the highest charge should be used. The same business line equally applies to any associated ancillary activity.
          9. An Authorised FirmG may use internal pricing methods to allocate gross income between business lines, provided that total gross income for the firm (as would be recorded under the Basic Indicator ApproachG ) still equals the sum of gross income for the eight business lines.
          10. The mapping of activities into business lines for Operational RiskG capital purposes should be consistent with the definitions of business lines used for regulatory capital calculations in other risk categories, i.e. credit and Market RiskG . Any deviations from this principle should be clearly motivated and documented.
          11. The mapping process used should be clearly documented. In particular, written business line definitions should be clear and detailed enough to allow third parties to replicate the business line mapping. Documentation should, among other things, clearly motivate any exceptions or overrides and be kept on record.
          12. Processes should be in place to define the mapping of any new activities or products and the mapping process to business lines should be subject to independent review.

          Table — Mapping of Business Lines

          Level 1 Level 2 Activity GroupsG
          Corporate Finance Corporate Finance Mergers and acquisitions, underwriting, privatisations, securitisation, research, debt (government, high yield), equity, syndications, IPO, secondary private placements.
          Municipal/Government Finance
          Merchant BankingG
          AdvisoryG Services
          Trading and Sales Sales Fixed income, equity, foreign exchanges, commodities, credit, funding, own position securities, lending and repos, brokerage, debt, prime brokerage.
          Market MakingG
          Proprietary Positions
          Treasury
          Retail BankingG Retail BankingG Retail lending and deposits, banking services, trust and estates.
          Private BankingG Private lending and deposits, banking services, trust and estates, investment advice.
          Card Services Merchant/commercial/corporat e cards, private labels and retail.
          Commercial BankingG Commercial BankingG Project finance, real estate, export finance, trade finance, factoring, leasing, lending, guarantees, bills of exchange.
          Payment and Settlement External ClientsG Payments and collections, funds transfer, clearing and Settlement.

          Note: Payment and settlement losses related to an Authorised Firm'sG own activities would be incorporated in the loss experience of the affected business line.
          Agency Services Custody Escrow, depository receipts, securities lending (customers) corporate actions.
          Corporate Agency IssuerG and paying agents.
          Corporate Trust -
          Asset Management Discretionary Fund ManagementG Pooled, segregated, retail, institutional, closed, open, private EquityG .
          Non-Discretionary Fund ManagementG Pooled, segregated, retail, institutional, closed, open.
          Retail Brokerage Retail Brokerage ExecutionG and full service.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]