The New DFSA

Prudential Framework
 Agenda

1. Overall Themes and Key Changes

2. Capital Requirements and Implications
3. Credit Risk
4. Operational Risk
5. Market Risk
6. Interest Rate Risk
7. Liquidity Risk
8. Group Risk
9. Public Disclosure Requirements
[Link] Review and Evaluation Processes
 Objectives of PIB Module Review

Improve risk management standards

for all Firms

Address existing gaps to be a more

effective supervisory tool

Implement Basel III

 Overall Approach to PIB Review

Minimise Basel III’s impact on non-banking

Firms

Enhance risk management standards for

banking and non-banking Firms

Improve compliance with Basel Core

Principles
 Key Policy Changes

Remove of Risk Capital Requirements for Asset Managers, Custodians

and Trust Service Providers

Require Capital to be held in Liquid Assets

Improve quality of Capital and Individual Capital Requirement (‘ICR’) for

banks

Change to the Credit Risk calculation methodology

Include Operational Risk requirements

Introduce internal risk assessment requirement for non-banking firms

Capital Requirements and Implications

Capital Requirements
and Implications
 Prudential Categories

Category 1 • Accepting Deposits

• Providing Credit
Category 2 • Dealing in Investments as Principal

• Dealing in Investments as Matched Principal

Category 3A • Dealing in Investments as Agent

• Providing Custody for a Fund

Category 3B • Acting as Trustee of a Fund

• Managing Assets
• Managing a Collective Investment Fund
Category 3C • Managing Restricted PSIAs
• Providing Custody (other than for a Fund)
• Providing Trust Services
 Prudential Categories

• Arranging Credit or Deals in Investments

• Advising on Financial Products or Credit
• Arranging Custody
• Insurance Intermediation
Category 4 • Insurance Management
• Operating an Alternative Trading System
• Providing Fund Administration
• Providing Trust Services

Category 5 • Managing Unrestricted PSIAs

 Capital Requirements

Base Capital Expenditure Based

Prudential Risk Capital
Requirement Capital Requirement
Category Requirement
(in USD) (‘EBCM’)
Category 1 10,000,000

Category 2 2,000,000


Category 3A 500,000


Category 3B 4,000,000 

Category 3C 500,000 

Category 4 10,000 

Category 5 10,000,000

 Capital Requirements

 Risk Capital Requirement

Risk Capital Requirement
=
Credit Risk Market Risk Operational Risk
Capital + Capital + Capital
Requirement Requirement Requirement

 Expenditure Based Capital Requirement (‘EBCM’)

No Client Assets or Client Assets or
Prudential Category
Insurance Money Insurance Money
Categories 2, 3A, 3B, 3C 13/52 18/52
Category 4 6/52 18/52
 Capital Components

Common Equity Permanent, fully paid up, perpetual

Tier 1 Capital • Share capital
• Share premium
(‘CET1’) • Retained earnings

Issued and fully paid up

• Subordinate to Tier 2
Additional Tier 1 • Perpetual
• May have callable option

Fully paid up
Tier 2 Capital • Maturity at least 5 years
• Subordinate
 Capital Resources
12.5%
2.0%

8.5% 2.0% 10%

3.3%
Capital
Conservation
2.5%
buffer
6.7%
0.7%

Minimum
6.0%
requirement 6.0%

CET 1 Additional Tier 2 T1 Tier 2 Lower

Tier I Tier 2

New Old
 Capital Conservation Buffer

 Required as 25% of Firms Risk Capital Requirement

 Must be CET 1

 If Firm does not meet Capital Conservation Buffer

(‘CCB’) there are conditions on:
– Distributions
– Bonuses
– Payments on capital instruments

 Capital conservation plan

 Capital Resources – Structure

Reference to PIB Rules

(A1) Elements of Common Equity Tier 1 (CET1) Capital Rule 3.13.2 and section 3.16

(A2) Adjustments to/deductions from CET1 Capital Rules 13.3.5 and 13.3.7

(A3) CET1 Capital = A1 – A2 Rule 3.13.1

(A4) Elements of Additional Tier 1 (AT1) Capital Rule 3.14.3

(A5) Deductions from AT1 Capital Rule 3.14.4

(A6) AT1 Capital = A4 – A5 Rule 3.14.1

(A7) Tier 1 (T1) Capital = A3 + A6 Rule 3.12.1

(A8) Elements of Tier 2 (T2) Capital Rule 3.15.3

(A9) Deductions from T2 Capital Rule 3.15.4
(A10) Tier 2 (T2) Capital = A8 – A9 Rule 3.15.1

(A11) Capital Resources = A7 + A10 Rule 3.11.1

 Capital – Implications for Categories
1, 2, 3A and 5 Firms
 Capital Resources – higher quality

 CCB – Capital Conservation Buffer

 CET1, AT1 and T2 capital

 Review usage of Lower Tier 1 (‘LT1’), T2 and sub-debt

 Revised methodology for Credit Risk Capital Requirement

 Operational Risk Capital Requirement

 Internal Capital Adequacy Assessment Process (‘ICAAP’)

requirement leading to Individual Capital Requirement (‘ICR’)
 Capital – Implications for Categories
3B and 3C Firms

 Removal of Risk Capital Requirement

 Need to maintain Liquid Assets for EBCM

 Base Capital Requirement (‘BCR’) = CET1 Capital

 Excess of EBCM over BCR – No limits on type of Capital

Resources

 Notification at 120% of Capital Requirement

 Capital – Implications for Categories
3B and 3C Firms

 Removal of Concentration Risk limits

 Operational Risk – systems and controls

 Professional Indemnity Insurance (‘PII’) requirement –

except Arranging Custody

 Internal Risk Assessment Process (‘IRAP’) requirement

 Capital – Implications for Category 4
Firms

 Need to maintain Liquid Assets for EBCM

 Base Capital Requirement = CET1 Capital

 Excess of EBCM over BCR can be funded with

any type of Capital Resources

 Notification at 120% of Capital Requirement

 Operational Risk – systems and controls

 PII requirement – except Arranging Custody

 Example – Category 3C Firm

Firm’s parameters
EBCM = 400,000 BCR = 500,000

 Capital Requirement = BCR = 500,000

 CET1 Capital > BCR 500,000
 Liquid Assets (PIB 3.5.3) > EBCM 400,000
 In this case, BCR > EBCM. So, no need for
capital of lower quality
 Example – Category 4 Firm

Firm’s parameters
EBCM = 300,000 BCR = 10,000

 Capital Requirement = EBCM = 300,000

 CET1 Capital > BCR 10,000
 Liquid Assets (PIB 3.5.3) > EBCM 300,000
 In this case, EBCM > BCR
 EBCM – BCR = 290,000. This can be met with
CET1, AT1 or T2 capital – no limits
 Key Points – 3A Firms

 New Credit Risk Capital methodology - follow-up

session on detailed methodology

 Any voluntary revision in EBCM – must be

submitted to DFSA within 7 days for approval

 1st year of operations – EBCM based on

forecast expenditure in business plan submitted
with application

 Review any LT1 and T2 capital in old regime –

for eligibility under new rules
 Key Points – 3B, 3C & 4 Firms

 Liquid assets > EBCM

 Eligibility of Sub-debt for T2 capital

 Notification – Capital Resources falls below 120% of

Capital Requirement

 If BCR > EBCM, then hold CET1 = BCR

 If EBCM > BCR, then EBCM – BCR can be met with

any type of Capital Resources

 Check for PII cover – annual submission required

Capital – Reporting
Capital – Reporting
Capital – Reporting
Credit Risk

Credit Risk
Credit Risk – Major Changes

Enhanced
systems and
controls
requirements

Specific asset
Follows Basel II classification
Standardised and
Approach provisioning
guidelines

Risk Weights to be
assigned on the Allows wider
basis of credit recognition of
ratings of the Credit Risk
borrower or the Mitigation
counterparty
 Credit Risk – Risk Management

 Applies to Authorised Firms in Categories 1, 2, 3A or 5

 Broaden and provide further detail on risk management

practices

 Key requirements:
– Risk management systems appropriate for Firms scale
and complexity
– Follow principles of good risk management
– Credit risk strategy, policy and procedures
– Responsibility lies with senior management and Board
– Credit assessment and provisioning
 Credit Risk – Risk Management

 Introduction of Provisioning Requirements:

– Firms must have a credit grading methodology
– Grading mechanism must be capable of identifying
problem credits
– Five broad categories of exposures - including minimum
provisioning requirements for domestic Firms
Credit categories % provision required on
unsecured credit
Standard -

Special Mention -

Substandard 20%

Doubtful 50%

Loss 100%
 Credit Risk – RWA Calculation
Methodology

 Change in methodology for calculation of Credit Risk

Weights – Standardised Approach (‘SA’)

 Risk Weights to be assigned on the basis of credit ratings

applied by the External Credit Assessment Institutions
(“ECAI’)

 Use ratings from DFSA recognised ECAI. Mapping is

available on the DFSA website

 Simplified Standardised Approach (‘SSA’) utilises the

country ratings as applied by the External Credit Agency
approved by the OECD* methodology
* OECD: Organisation for Economic Co-operation and Development
 Credit Risk – RWA Calculation
Methodology

 Example Credit Quality Step mapping table

 Located on DFSA website under Policy Statements

 Credit Risk – RWA Calculation
Methodology

RWA Calculation
Prudential Category
Methodology

Category 1 SA

SA unless approved by the

Category 2
DFSA to adopt SSA

SSA unless approved by

Category 3A
the DFSA to adopt SA

Categories 3B, 3C and 4 Not Applicable

Category 5 SA Only
 Credit Risk – RWA Calculation
Methodology
 Standardised Methodology overview

1. Classify the Exposures into asset classes as per PIB 4.10

(10 categories e.g. Central Government, Banks, Corporates etc.)

2. Determine Credit Quality Grade (‘CQG’) as required at

PIB 4.12.2 to 4.12.26 using the ECAI mapping tables

3. Using the CQG determine the applicable Credit Risk Weight

(‘CRW’)

4. Calculate Credit Risk Capital Requirement (‘CRCOM’)

 Credit Risk – RWA Calculation
Methodology

 Calculation of Credit Risk Capital Requirement

CRCOM = Credit RWA x 10%

Credit Risk Credit Risk Capital
Capital Requirement Weighted Asset Charge

 Every On and Off Balance Sheet item to be included

 Amount of each Credit RWA based on ‘E’

 Credit Risk – RWA Calculation
Methodology

 Calculation of Credit Risk Capital Requirement

CRCOM = Credit RWA x 10%

Amount of Counterparty
Credit RWA = Exposure x Risk Weight
‘E’ ‘CRW’
Exposure net of
Credit Risk Depends on Asset
Mitigation Class and Credit Rating
 Credit Risk SA – Example
Standardised Approach

Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5)

Step 1: Calculate Credit RWA

Credit Risk Counterparty Risk

= Amount of Exposure x
Weighted Asset Weight

Credit RWA = E x CRW

30,000 = 20,000 x 150% *

* Risk weight for claims on B+ corporates - Standardised Approach

 Credit Risk SA – Example
Standardised Approach

Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5)

Step 2: Calculate CRCOM

Credit Risk
Credit Risk
Capital = x Capital Charge
Weighted Asset
Requirement

CRCOM = Credit RWA x 10%

3,000 = 30,000 x 10%

 Credit Risk – Simplified Standardised

 SSA applicable to Category 2 and 3A Authorised Firms

 Same calculation approach as SA

 CRW for Banks and Sovereigns are based on Export

Credit Agencies supported by OECD ratings

 All corporates carry 100% weighting. No risk adjustment.

 Limitations on use of Credit Risk Mitigation (‘CRM’)

 Credit Risk Mitigation

 Credit Risk Mitigation is a technique used to reduce Credit Risk

exposures and receive a regulatory capital relief

 CRM is a risk-sensitive approach for the calculation of Credit

Risk Capital requirements

 Same categories of Credit Risk mitigants as in the previous

regime; however, the range and the treatment of these
instruments differ for the purpose of calculating Credit Risk
Capital charge

 Using CRM may increase Residual Risks (Legal, Operational,

Liquidity and Market Risks)

»»» Legal and Operational Requirements

 Credit Risk Mitigation

Credit Risk Mitigation

Legal and Operational Requirements

On-Balance Credit
Collateral Guarantees
Sheet Netting Derivatives
Legal & Op. Legal & Op. Legal & Op. Legal & Op.
Requirements Requirements Requirements Requirements

Comprehensive
Simple Approach
Approach

Haircuts

Supervisory
Haircuts
Own Estimates
Haircuts

Zero Haircut

VAR Model
Haircuts

Maturity Mismatches
Currency Mismatches
 Credit Risk Mitigation

Legal and Operational Requirements

 Legal Requirements
• Documentation must be binding on all parties and legally enforceable in all
relevant jurisdictions
• Firms to conduct sufficient legal review to verify this

 Risk Management Requirements

• Employ robust procedures and processes to control Residual Risks

If Residual Risks are not adequately controlled, DFSA may impose additional
capital charges or take appropriate supervisory actions.
 Credit Risk Mitigation

Collateral Eligible collaterals include only financial collaterals - instruments that

can be quickly disposed of and converted into cash

Simple Approach SA & SSA - substitutes the risk weight of the collateral for
the risk weight of the counterparty for the collateralised
portion of the exposure - subject to a CRW floor of 20%
Comprehensive SA only - full offset of eligible collateral against exposures
Approach
by reducing the “volatility adjusted” amount of the exposure
by the “volatility adjusted” value of the collateral

Values of the exposure and the collateral are adjusted by

applying haircuts - exposure is adjusted to represent
possible exposure growth, collateral is adjusted to represent
collateral value loss due to market fluctuations
Supervisory Own Estimates VAR Model
Zero Haircut
Haircuts Haircuts Haircuts

DFSA Approval
 Credit Risk Mitigation – Examples
Collateralised Transactions: Simple Approach
Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 8M and
a residual maturity of 5 years. The EUR/USD exchange rate = 1.4

Step 1: Calculate the value of the credit protection adjusted

for currency mismatch

Ca = [ C x ( 1 – Hfx ) ]

C = EUR 8,000 x 1.4 = USD 11,200

Hfx = 8%
(Haircut for currency mismatch between the exposure and the collateral)

Ca = [ 11,200 x ( 1 – 0.08 ) ] = 11,200 x 0.92 = 10,304

 Credit Risk Mitigation – Examples
Collateralised Transactions: Simple Approach
Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 8M and
a residual maturity of 5 years. The EUR/USD exchange rate = 1.4

Step 2: Calculate CRCOM for the unsecured portion

Counterparty
Counterparty Capital
Risk Capital = Amount of Exposure x x
Risk Weight Charge
Component

CRCOM 1 = E x CRW x 10%

1,454 = (20,000 – 10,304) x 150% * x 10%

* Risk weight for claims on B+ corporates - Standardised Approach

 Credit Risk Mitigation – Examples
Collateralised Transactions: Simple Approach
Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 8M and
a residual maturity of 5 years. The EUR/USD exchange rate = 1.4

Step 3: Calculate CRCOM for the collateralised portion

Counterparty
Counterparty Capital
Risk Capital = Amount of Exposure x x
Risk Weight Charge
Component

CRCOM 2 = E x CRW x 10%

206 = 10,304 x 20% * x 10%

* Risk weight for claims on AA- banks - Standardised Approach

 Credit Risk Mitigation – Examples
Collateralised Transactions: Simple Approach
Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 8M and
a residual maturity of 5 years. The EUR/USD exchange rate = 1.4

Step 4: Calculate Total CRCOM

CRCOM = CRCOM 1 + CRCOM 2

1,660 = 1,454 + 206

 Credit Risk Mitigation – Examples
Collateralised Transactions: Comprehensive Approach
Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 8M and
a residual maturity of 5 years. The EUR/USD exchange rate = 1.4

Step 1: Calculate the exposure value after risk mitigation

E* = max { 0; [ E x ( 1 + He ) – C x ( 1 – Hc – Hfx ) ] }
E = USD 20,000
He = 0% (Haircut applicable for a cash exposure)
C = EUR 8,000 x 1.4 = USD 11,200
Hc = 4% (Haircut applicable for a debt security issued by AA-/1 bank,
residual maturity of 5 years)
Hfx = 8% (Haircut for currency mismatch)
 Credit Risk Mitigation – Examples
Collateralised Transactions: Comprehensive Approach
Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 8M and
a residual maturity of 5 years. The EUR/USD exchange rate = 1.4

Step 1: Calculate the exposure value after risk mitigation

E* = max { 0; [ E x ( 1 + He ) – C x ( 1 – Hc – Hfx ) ] }

E* = max { 0; [20,000 x (1 + 0%) – 11,200 x (1– 4% – 8%)]}

E* = max { 0; [20,000 – (11,200 x 0.88)]}

E* = max { 0; 10,144} = 10,144

 Credit Risk Mitigation – Examples
Collateralised Transactions: Comprehensive Approach
Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 8M and
a residual maturity of 5 years. The EUR/USD exchange rate = 1.4

Step 2: Calculate CRCOM

Counterparty
Counterparty Capital
Risk Capital = Amount of Exposure x x
Risk Weight Charge
Component

CRCOM = E* x CRW x 10%

1,522 = 10,144 x 150% * x 10%

* Risk weight for claims on B+ corporates - Standardised Approach

 Credit Risk Mitigation

Eligible collaterals include only financial collaterals - instruments that

Collateral
can be quickly disposed of and converted into cash

Simple Approach SA & SSA - substitutes the risk weight of the collateral for
the risk weight of the counterparty for the collateralised
portion of the exposure - subject to a CRW floor of 20%
Comprehensive SA only - full offset of eligible collateral against exposures
Approach
by reducing the exposure amount by the value ascribed to
the collateral
On-Balance a debit exposure is offset by a credit exposure (deposits) to the same
Sheet Netting counterparty. Regulatory capital is calculated over the net exposure.

• Substitution principal - counterparty risk weight for the unsecured

Guarantees
portion and guarantor risk weight for the guaranteed portion
• Only Guarantees and Credit Derivatives provided by certain
Credit institutions are recognised as eligible
Derivatives • Only Credit Default Swaps and Total Return Swaps are recognised
 Concentration Risk

 No major changes to policy

 Metrics of 10%, 25% and 800% continue to apply

 Introducing additional systems and controls requirements

 Amendment and redefining of exclusions and reliefs

 Specific introduction of Institutional Exemption

 Specific provisions for Parental Guarantees

 Concentration Risk – Institutional
Exemption

 Aim is to permit exposures to other Financial Institutions

in specific circumstances

 Limit of the lower of US$100 million or 100% of the

Firms’ capital

 Counterparties must have Credit Quality Grades of 1 – 3

i.e. Investment Grade

 Counterparties risk profile must be subject to Credit Risk

reviews at least annually
 Concentration Risk – Parental
Guarantees
 Enables Firms to exclude an Exposure from the 25%
Concentration Risk limit where it is guaranteed by the
Firms’ Parent or other regulated entity of its Group
• Conditions:
– Guarantees must meet CRM requirements
– Guarantees provided must be less than 10% of the
Parents capital resources
– Parents’ Credit Quality Grade of 1 or 2
– Parent’s regulatory confirmations
– Overall Large Exposure limit of 800% applies

Firm to notify the DFSA if Parental Guarantees at 200%,

400% and 600% of Capital Resources
 Concentration Risk – Example

Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 12M
and a residual maturity of 5 years. The EUR/USD exchange rate = 1.4. Bank A has
Capital Resources of 50M.

E = USD 20,000 = 20,000 / 50,000 = 40% > 25% Capital Resources

Calculate the exposure value after risk mitigation

E* = max { 0; [ E x ( 1 + He ) – C x ( 1 – Hc – Hfx ) ] }
He = 0% (Haircut applicable for a cash exposure)
C = EUR 12,000 x 1.4 = USD 16,800
Hc = 4% (Haircut applicable for a debt security issued by AA-/1 bank,
residual maturity of 5 years)
Hfx = 8% (Haircut for currency mismatch)
 Concentration Risk – Example

Bank A grants a 5 years loan of USD 20M to Corporate C (Rating B+ = CQG 5) against a
debt security issued by Bank B (Rating AA- = CQG 1) with a market value of EUR 12M
and a residual maturity of 5 years. The EUR/USD exchange rate = 1.4. Bank A has
Capital Resources of 50M.

E = USD 20,000 = 20,000 / 50,000 = 40% > 25% Capital Resources

E* = max { 0; [ E x ( 1 + He ) – C x ( 1 – Hc – Hfx ) ] }

E* = max { 0; [20,000 x (1 + 0%) – 16,800 x (1– 4% – 8%)]}

E* = max { 0; [20,000 – (16,800 x 0.88)]}

E* = max { 0; [20,000 – 14,784]} = max { 0; 5,216} = 5,216

> 25% Capital Resources

E* = max { 0; [20,000 – 12,500]} = max { 0; 7,500} = 7,500

 Counterparty Credit Risk

 Continues with the existing Current Exposure Method (‘CEM’)

 Adopts the Basel provision on treatment of Counterparty Credit

Risk (‘CCR’) exposure to a central counterparty

 Provisions of additional capital charge on account of Credit

Value Adjustments (‘CVA’) not introduced

 Rules continue to allow firms to reduce the value of the CCR

exposure through specific provisioning, credit derivatives, use
of collateral and netting

 Methodology for recognition of eligible collateral and the

conditions for netting follows the approaches specified under
the Credit Risk Mitigation provisions
Operational Risk

Operational Risk
 Operational Risk

The risk of loss resulting from inadequate or failed

 internal processes
 people
 systems
 external events

Operational Risk definition also covers legal risk

 Operational Risk

Risk Management All Prudential Categories

Systems and Controls

Capital Requirements Prudential Categories 1, 2, 3A and 5

Professional Indemnity Prudential Categories 3B, 3C and 4

Insurance (‘PII’)
 Operational Risk
Risk Management
Systems and Controls

Governance Arrangements

Senior Management Responsibilities

Risk Identification Monitoring and Control and
and Assessment Reporting Mitigation
 Approval process  Management  Internal Controls
for new Information System
• Product
 Risk Transfer
• Activity  Notification of Strategies
• Process material Op Risk
• System event to DFSA

 Op Risk Events
tracking

Information Business Trading

IT Systems Outsourcing
Security Continuity Processes
 Operational Risk
Risk Management
Systems and Controls

 Risk Management Framework and Governance

• Establish and maintain Operational Risk Policy

• Governing Body to approve the Operational Risk Policy

• Guidance on Governing Body and Senior Management

responsibilities
 Operational Risk
Risk Management
Systems and Controls

 Key aspects to be considered in the Operational Risk

Policy
• Governance structure
• Risk assessment tools
• Operational Risk appetite
• Approach to establishing and monitoring thresholds or
tolerances
• Risk reporting and Management Information Systems
(‘MIS’)
• Independent review of the Operational Risk framework
 Operational Risk
Risk Management
Systems and Controls

 Additional guidance and enhancements in the areas of

• IT Systems
• Information Security
• Outsourcing
• Business Continuity and Disaster Recovery
• Management of Operational Risks in trading rooms
 Operational Risk
Risk Management
Systems and Controls

 Complements existing overarching systems and controls

and governance requirements in GEN Module

 Provides for implementation in a proportionate manner

 Requires firms to systematically track Operational Risk

events

 Operational Risk event types to be consistent with the

Basel framework

 Approval process for new products, activities, processes

and systems
 Operational Risk

Risk Management All Prudential Categories

Systems and Controls

Capital Requirements Prudential Categories 1, 2, 3A and 5

Professional Indemnity Prudential Categories 3B, 3C and 4

Insurance (‘PII’)
 Operational Risk

Capital Requirements

Alternative
Basic Indicator Standardised
Standardised
Approach Approach
Approach
(‘BIA’) (‘SA’)
(‘ASA’)

Default Alternative Alternative

Methodology Methodology Methodology
Subject to DFSA prior approval
 Operational Risk

Basic Indicator Approach

Operational Risk
Capital Requirement

=
Gross Annual Gross Annual Gross Annual
Income
Year 1 + Income
Year 2 + Income
Year 3
(where positive) (where positive) (where positive)

x 15%
3
 Operational Risk

Standardised Approach

Operational Risk
Capital Requirement

=
Gross Annual Gross Annual Gross Annual
Income
Year 1
(where positive)
+ Income
Year 2
(where positive)
+ Income
Year 3
(where positive) Beta
x Factor
3
Corporate Trading & Retail Commercial Payment & Agency Asset Retail
Finance Sales Banking Banking Settlement Services Management Brokerage

18% 18% 12% 15% 18% 15% 12% 12%

 Operational Risk

Risk Management All Prudential Categories

Systems and Controls

Capital Requirements Prudential Categories 1, 2, 3A and 5

Professional Indemnity Prudential Categories 3B, 3C and 4

Insurance (‘PII’)
 Operational Risk

Professional Indemnity
Insurance (‘PII’)
 Extends requirement to hold PII cover to a wider set of financial
services activity (before it was applicable only to Trust Service
Providers).
 PII applicable to the following financial services:
• Arranging Credit or Deals in Investments
• Managing Assets
• Advising on Financial Products or Credit
• Managing a Collective Investment Fund
• Providing Custody
• Insurance Intermediation
• Insurance Management
• Managing a Profit Sharing Investment Account
• Providing Trust Services
• Providing Fund Administration
• Acting as the Trustee of a Fund
 Operational Risk

Professional Indemnity
Insurance (‘PII’)

 Appropriate to the nature, size, complexity and risk profile

of the Firm’s business

 Issued by a reputable and well-capitalised insurer

 Include cover in respect of conduct of employees and legal

costs
 Operational Risk

Professional Indemnity
Insurance (‘PII’)

An Authorised Firm must:

 Provide the DFSA a copy of the PII policy

 Notify the DFSA of any material changes to the cover

 Notify the DFSA of any significant PII claim made

An Authorised Firm can fulfill the requirements by ensuring

coverage of activities under a Group-wide PII policy
Market Risk

Market Risk
 Market Risk

 Improved systems and controls including for Trading Book (‘TB’)

 Enhanced definition of Trading Intent and TB Policy

 No material changes to the methodologies for determination of

Market Risk Capital requirement

 Introduced capital requirement for Collective Investment Fund

Risk

 Enhanced guidance on
• Prudent valuation
• Internal models for market risk
• Stress Testing and Incremental Risk Charge (‘IRC’) models
 Interest Rate Risk

Interest Rate Risk

in the Non-Trading Book
 Interest Rate Risk

 Applies to Category 1 and 2 Authorised Firms

 Systems and controls requirements including policy,

strategy and governance framework

 Requirement for frequent evaluation of exposures to

Interest Rate Risk (‘IRR’) in Non-Trading Book (“NTB’)

 IRR-NTB to be covered under the Supervisory Review

and Evaluation Process – IRAP and ICAAP
 Interest Rate Risk

 No explicit capital charge requirements, however, the

DFSA may impose ICR

 Quarterly assessment of the effect of an unexpected

interest rate shock of 200 Bp

 If Economic Value decline by more than 20% of Capital

Resources »»» immediate notification to the DFSA
Liquidity Risk

Liquidity Risk
 Liquidity Risk

 No major changes to policy

 Enhanced systems and controls requirements

 Liquidity limits for Category 1 and 5 Firms of 15% and 25%

continue to apply

 Implement new liquidity measures in observation phase,

consistent with Basel III timelines
– Coverage only for banks and principal dealers

 Collect and monitor information required to implement the

measures – periodic reports

 Appropriate calibration of parameters – wherever national

discretions are available
Group Risk

Group Risk
 Group Risk – Changes

 Enhanced definitions of Financial Group, Financial Group

Capital Requirement and Financial Group Capital
Resources

 Financial Group Capital Requirement calculated using the

accounting consolidation method as per IFRS*

 Domestic Bank in the DIFC must always have a regulated

bank or bank holding company as its Parent

 A Domestic Firm in Categories 3A, 3B, 3C & 4 (which is

not a Subsidiary) cannot start a Bank or an Insurer

* IFRS: International Financial Reporting Standards

Disclosure Requirements

Public Disclosure
Requirements
 Disclosure Requirements

 Introduces enhanced disclosure requirements in line with

Pillar 3 of Basel Framework

 Aimed at ensuring adequate disclosures to market

participants

 Applicable to Authorised Firms in Prudential Category

1, 2 or 5.
 Disclosure Requirements

 Member of a Financial Group to ensure that the

disclosures are made at Financial Group level

 Exemption from the disclosure requirements for a

subsidiary of
(a) a Regulated Financial Institution, or
(b) another Authorised Firm is in Category 1, 2 or 5

which is already subject to equivalent Public Disclosure

Requirements
 Disclosure Requirements

 Include Quantitative and Qualitative disclosures about

the firm’s
– Capital Resources
– Capital Adequacy
– Credit Risk
– Credit Risk Mitigation
– Exposures to Counterparty Credit Risk
– Securitisation Exposures
– Market Risk
– Operational Risk
– Interest Rate Risk in the Non-Trading Book
 Disclosure Requirements

 Requirement to implement and maintain a written

disclosure policy

 Appropriate verification to ensure accuracy and

timeliness of disclosures

 Avoid duplication if disclosure is similar to a disclosure

required under the IFRS
 Disclosure Requirements

Frequency, Location and Process

 Disclosures of CET1 Capital, T1 Capital and T2 Capital
and deductions from Capital Resources required quarterly

 Other disclosures to be made at least once a year

 Reporting deadlines are in accordance with quarterly and

annual reporting obligations

 Disclosures to be made (subject to certain exceptions)

either in the firm’s annual report or periodic financial
statements
 Disclosure Requirements

Omissions
 Authorised Firms may omit certain disclosures based on:
- Materiality
- Proprietary nature
- Confidentiality

 For any quantitative disclosure omitted, to disclose

general qualitative information about the subject matter
along with reasons for omission
 Supervisory Review and Evaluation
Processes

Supervisory Review and

Evaluation Processes
 Supervisory Review and Evaluation
Processes

 Aim is to promote internal risk assessments by Authorised

Firms to assess risks faced from their activities

 Internal Risk Assessment Process (‘IRAP’) applies to all

Authorised Firms other than Category 4 Firms

 Internal Capital Adequacy Assessment Process (‘ICAAP’)

applies only to Category 1, 2, 3A and 5 Firms

 DFSA Supervisory Review and Assessment Programme

 Effective Financial Year ending 2013

 Supervisory Review and Evaluation
Processes

 Supervisory Review and Evaluation Process (‘SREP’)

 Completed by the DFSA on receipt of IRAP and ICAAP

 Aim to enable assessment of risk profile of firms

 Purpose is to assess the quality of IRAP or ICAAP

 ICAAP may result in DFSA placing an Individual Capital

Requirement on the Firm

 Case by case assessment

 Internal Risk Assessment Process

IRAP is applicable to all Firms other than Category 4. It is a

comprehensive internal risk assessment

IRAP

DFSA Board
SREP approvals
 Internal Risk Assessment Process

IRAP Methodology

Risks identified

Board and
Risk
Senior
management
Management
strategies
approvals

IRAP

Stress testing Assessment of

and scenario financial
analysis position
 Internal Capital Adequacy Assessment
Process
ICAAP is an assessment used to determine appropriate
capital required as determined by the IRAP

IRAP

Individual
Capital
Requirement
ICAAP ICAAP

DFSA
SREP
 Internal Capital Adequacy Assessment
Process
ICAAP is an assessment used to determine appropriate
capital required as determined by the IRAP
Corporate
strategy

Board and
Senior
Estimate Capital
Management
Approvals

ICAAP
Capital required Sensitivity
to support analysis and
growth stress testing

Estimation of
losses from
historical data
 Questions?

If you have specific questions, please contact your Relationship

Manager.

For general queries about the DFSA PIB Module, you can contact
any of the following:

Prasanna Seshachellam, Director - Supervision

pseshachellam@[Link]

Alan Burke, Associate Director - Supervision

aburke@[Link]

Nagendra Shivaraya, Senior Manager - Supervision

snagendra@[Link]

Mohamad El Khalil, Senior Manager - Supervision

melkhalil@[Link]
Thank You