The DFSA Rulebook

1 The dfsa Rulebook Prudential Investment, Insurance Intermediation and banking Business Module (PIB) PRUDENTIAL INVESTMENT, INSURANCE INTERMEDIATION AND banking BUSINESS (PIB) PIB/VER13/12-07 1 Contents The contents of this module are divided into the following chapters, sections and appendices: 1 GENERAL 5 5 Financial resources .. 5 Categories of Authorised Firms .. 6 The trading book .. 11 12 Submission of 12 Report to the dfsa .. 19 2 CAPITAL .. 22 22 Basic 22 Initial and ongoing capital 23 Base capital 25 Expenditure based capital minimum.

2 26 Calculation of capital resources .. 27 Components of 29 Limits on the use of different forms of 34 Components of capital specific to Authorised Firms which undertake Islamic financial business .. 37 Subordinated debt .. 37 3 PRUDENTIAL REQUIREMENTS FOR AUTHORISED FIRMS UNDERTAKING ISLAMIC FINANCIAL 40 40 Initial and ongoing capital requirements applicable to Authorised Firms which undertake Islamic financial 41 Systems and controls requirements in relation to an Authorised Firm s Islamic financial business .. 43 Displaced commercial 44 Risk weightings for Islamic contracts in the non-trading 45 Concentration risk.

3 48 Management of PSIAs .. 49 PRUDENTIAL INVESTMENT, INSURANCE INTERMEDIATION AND banking BUSINESS (PIB) 2 PIB/VER13/12-07 4 CREDIT RISK .. 50 50 Credit risk systems and controls .. 51 Credit risk in the non-trading book .. 54 Counterparty risk in the trading book .. 56 Concentration risk .. 58 Collateral .. 61 Netting .. 63 66 Credit 69 Application of credit risk methodology to Authorised Firms undertaking Islamic financial business .. 70 5 MARKET RISK .. 71 71 Market risk systems and controls .. 71 Use of internal market risk models .. 72 Interest rate risk capital requirement.

4 74 Equity risk capital requirement .. 74 Foreign exchange risk capital requirement .. 75 Commodities risk capital requirement .. 76 Option risk capital 76 Securities underwriting capital requirement .. 77 6 LIQUIDITY RISK .. 79 79 Liquidity systems and controls .. 79 Liquidity requirements .. 86 7 GROUP 89 89 Systems and controls requirements .. 90 Financial group capital requirements and financial group capital resources .. 90 Financial group concentration risk limits .. 93 PRUDENTIAL INVESTMENT, INSURANCE INTERMEDIATION AND banking BUSINESS (PIB) 3 PIB/VER13/12-07 8 OPERATIONAL 94 App1 GENERAL REQUIREMENTS - DETAIL IN THE TRADING BOOK.

5 95 How to include positions in the trading book .. 95 Value of trading book positions .. 95 Positions included in the trading 95 Repurchase and reverse repurchase agreements .. 97 Hedging of a trading book exposure by a non-financial instrument .. 98 Hedging a non-trading book exposure by a specific financial instrument .. 99 Transfer of general market risk between the trading book and the non-trading 99 App2 CAPITAL .. 101 Stress and scenario testing .. 101 App3 [not currently used].. 103 App4 CREDIT RISK .. 104 104 Credit risk systems and controls .. 104 Credit risk in the non-trading book.

6 113 Repurchase agreements, reverse repurchase agreements, similar transactions and other deferred settlements .. 125 Other trading book transactions .. 126 Concentration risk .. 127 Netting .. 137 137 Credit 148 PRUDENTIAL INVESTMENT, INSURANCE INTERMEDIATION AND banking BUSINESS (PIB) 4 PIB/VER13/12-07 App5 MARKET RISK .. 160 Market risk systems and controls .. 160 Interest rate risk capital requirement .. 162 Equity risk capital requirement .. 177 Foreign exchange risk capital requirement .. 185 Commodities risk capital requirement .. 187 Option risk capital 191 Securities underwriting risk capital 195 Criteria for use of internally developed market risk 196 App6 Liquidity.

7 201 Application for a global liquidity concession .. 201 Including inflows (assets) and outflows (liabilities) in the time 201 Including marketable assets in the maturity ladder .. 202 App7 Reporting to dfsa .. 204 [Deleted][VER12/11-07][RM51/07].. 204 Reporting of group capital 204 PRUDENTIAL INVESTMENT, INSURANCE INTERMEDIATION AND banking BUSINESS (PIB) 5 PIB/VER13/12-07 1 GENERAL REQUIREMENTS Application (1) This module (PIB) applies to every Authorised Firm other than an Insurer. (2) The Rules in this module apply to an Authorised Firm in accordance with its Category determined under section Guidance 1.

8 The effect of Rule is that these Rules apply to all Authorised Firms, except those carrying on Insurance Business, that is, Insurers. Those Authorised Firms that are authorised to effect or carry out Contracts of Insurance should refer to the PIN module. These Rules apply both to Domestic Firms and Authorised Firms conducting Financial Services through a branch in the DIFC. The dfsa may modify or waive the operation of certain Rules or specified parts of such Rules in appropriate circumstances. The dfsa is more likely to consider such modifications or waivers in the case of those Authorised Firms operating in the DIFC through a branch.

9 It is unlikely, however, the dfsa will waive or modify the system and control requirements. 2. The dfsa s Rules reinforce the fitness and proprietary requirements, GEN chapter 5 - Management Systems and Principle 4 for Authorised Firms. The PIB module is set out in: a. two general chapters setting overall requirements: General Requirements and Capital; and b. six chapters setting specific requirements relating to the following particular risks or issues: Islamic Financial Business (including Displaced Commercial Risk), Credit Risk, Market Risk, Liquidity Risk, Group Risk and Operational Risk.

10 3. The application of each section of this module as it applies to each Category of Authorised Firm is set out in Table 4 of this chapter. [Amended][VER12/11-07]RM51/07] [Amended][VER13/12-07][RM54/07] Financial resources An Authorised Firm must: (a) have and maintain at all times financial resources of the kinds and amounts specified in, and calculated in accordance with, the Rules in this module; and PRUDENTIAL INVESTMENT, INSURANCE INTERMEDIATION AND banking BUSINESS (PIB) 6 PIB/VER13/12-07 (b) ensure that it maintains financial resources in addition to the requirement in (a) which are adequate in relation to the nature, size and complexity of its business to ensure that there is no significant risk that liabilities cannot be met as they fall due.